Oracle (ORCL +2.15%) stock jumped 4.5% through 9:50 a.m. ET Wednesday, and you can thank Citigroup for that.
In a note covered on StreetInsider.com this morning, Citi argues that "one of the most extreme dislocations and drawdowns in the stock's history" has made Oracle stock a buy.
Image source: Oracle.
Oracle's got problems
From June peak to July trough, Oracle stock fell 54% as investors panicked over the massive spending (and debt) commitments Oracle has undertaken to build artificial intelligence infrastructure for clients such as Microsoft and Open AI.
These are valid concerns. In five years, Oracle has grown its debt load 60%, even as its free cash flow production swung from positive $13.8 billion to negative $23.7 billion. And the burning of cash isn't over yet. Analysts polled by S&P Global Market Intelligence forecast that the next two years will see Oracle burn another $90 billion.
NYSE: ORCL
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Why Citi loves Oracle stock
Regardless, Citi thinks the bad news for Oracle is well and truly baked into the stock price at this point. Demand for AI services is "insatiable," says the banker, and the $85 billion in backlogged work Oracle has amassed is nearly enough to cover its cash needs. By 2030, the banker estimates Oracle's current GAAP profits could triple or even quadruple, delivering per-share earnings of $22 that year.
Assuming Oracle survives the next couple of years of cash burn to reach that point, Citi believes today's prices offer an "historic" opportunity to buy low and sell high later. (Citi estimates the stock could be worth as much as $330 per share.)
With Oracle stock trading for a price-to-earnings ratio of less than 25, and growth estimated at 27% annually over the next five years, Citi might even be right about that.
