Morningstar Economic Moat Rating
: Wide
Morningstar Uncertainty Rating
: Very High
We have lowered our economic moat rating for Oracle ORCL to narrow from wide following a review of artificial intelligence’s potential disruption to the global technology sector.
Why it matters: To issue a wide moat rating, we need to believe the company can almost certainly deliver a return on invested capital above its cost of capital over the next decade. With AI’s capabilities quickly expanding, we are no longer confident about the certainty behind Oracle’s wide moat.
Oracle’s database and enterprise software enjoy deep integration with customers’ mission-critical business processes. However, they are not immune to AI’s disruption, given large language models’ capabilities to enable a brand-new natural-language-based user interaction paradigm.Oracle Cloud Infrastructure is poised to benefit from generative AI’s growth over the long term, given Oracle’s partnership with leading AI labs like OpenAI and xAI. That said, potential supply chain bottlenecks and financing delays both bring tail risk to Oracle’s ambitious data center buildout.
The bottom line: In addition to downgrading our economic moat rating to narrow, we also reduced Oracle’s fair value estimate to USD 215, from USD 277 previously. We also maintain our Very High Morningstar Uncertainty Rating. Despite our adjustments, shares remain attractive.
We lowered our five-year annualized growth forecast by 70 basis points to 9.3% for Oracle Cloud Applications based on customer hesitation around adopting “agentic” AI for enterprise system modernization. We leave our five-year annualized growth forecast for OCI at 76%, for now.Most of our fair value reduction came from terminal assumption changes, a result of OCI’s murky terminal profitability. We reduced our combined stage-one and stage-two length by five years, to 15 years. We also cut our terminal return on new investment capital by 700 basis points to 27%.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
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