Meet the Beaten-Down AI Cloud Stock That Just Sold Off but Has 120% Upside, According to Wall Street

Many artificial intelligence stocks have soared recently, but not all of them. Case in point: database leader and AI cloud provider Oracle (NYSE: ORCL), which sold off hard following its recent earnings report.

Despite the turmoil in the stock, at least one Wall Street analyst thinks the concerns are overblown and projects a 120% upside.

So who is right? Is Oracle the rare AI stock at a strong value today? Or a pretender to the throne?

Why Oracle plunged after earnings

Oracle is currently smack-dab in the middle of a business model change, making investors nervous. Before the explosion of artificial intelligence, Oracle was the dominant database software company for large enterprises. This was an extremely high-margin business.

A few years ago, Oracle embarked on a path to become a cloud computing company, investing in data centers to rent to large enterprises. The company was a late entrant and is in a distant fourth place among large U.S. cloud providers. Nevertheless, the business is growing fast, up 93% last quarter.

With the advent of AI, Oracle is turbocharging this pivot to become an AI-first cloud, greatly expanding capital expenditures and inking major deals with AI companies.

While this move is likely prudent and could yield significant growth, investors are clearly worried about Oracle's transitioning from an asset-light business to a capital-intensive, competitive one, with margins that might be lower than those of the traditional database business.

Some of those fears emerged on the recent earnings call. After a five-point reduction in gross margin for the fiscal year ended in March 2026, Oracle management said it expects another step down in gross margin in the year ahead. That's due to the huge depreciation costs associated with its AI cloud build-out.

Meanwhile, that buildout is accelerating, overwhelming even Oracle's robust operating cash flow and requiring it to take on significant debt, in addition to diluting shareholders. Over the course of last year, Oracle's gross debt surged from abut $90 billion to roughly $130 billion, offset by $33 billion in cash.

Oracle now expects to raise $40 billion in either debt or equity this year, to fund another $90 billion to $95 billion in capital expenditures on data centers, offset by $20 billion to $25 billion in customer pre-payments, up from $56 billion offset by $8 billion in pre-payments last year.

As a result of all this investment and lower margins in the AI cloud business, Oracle is predicting 34% revenue growth but just 18% growth in adjusted earnings per share for fiscal 2027.

The upside case

Despite the sell-off driven by these concerns, at least one Wall Street analyst thinks otherwise: Investment bank Jefferies maintains a street-high $400 price target on the stock, good for about 120% upside.

That valuation, which would amount to about 50 times this year's earnings estimates, might seem aggressive at first. However, if all of this investment in AI data centers generates an acceptable return, then the huge growth opportunity from AI may in fact justify the target.

After all, Oracle's remaining performance obligations (RPO) for its cloud business surged last quarter to $638 billion, up 363% year over year and 15% quarter over quarter. That stands in contrast to the mere $18.1 billion in cloud infrastructure revenue Oracle generated in its entire recent fiscal year. Management noted on the conference call with analysts that it expected to recognize about 12% of that RPO in the next 12 months. That would equate to $76.6 billion, over four times the cloud infrastructure revenue over the prior 12 months.

Image source: Getty Images.

The two main concerns

So what's the problem? There are two big concerns. One is the ultimate profitability of all that data center spending, and the other is whether all that RPO will be honored. Nearly half of Oracle's RPO comes from one large language model shop: OpenAI.

While there are certain competitive concerns regarding OpenAI, OpenAI is still likely to be among the top few model providers for the foreseeable future.

As to profitability, Oracle's new chief financial officer, Hilary Maxson, disclosed that Oracle expects its return on invested capital for the cloud infrastructure business to be in the high-20% range, once the build-out reaches a "steady state."

While a high-20% ROIC is lower than the company's massive software business, it's still well above most companies' cost of capital and would constitute a terrific business. If that ROIC metric holds, Oracle should probably be a much more valuable company than it is today, given its immense backlog.

Can Oracle truly differentiate?

Investors seem skeptical that Oracle can truly differentiate itself among other cloud companies in the age of AI. After all, Oracle was a first mover in database software and then solidified its position over time because of the high switching costs of moving one's data to another vendor. In the cloud, Oracle is a follower, not a first mover.

Still, on the call with analysts, management noted that building and delivering massive AI data centers wasn't easy. Co-CEO Clayton Magouyrk noted: "What I can tell you is it is not easy to build an extremely efficient, highly secure, robust cloud. So I think that our customers see and appreciate the value of what we provide."

Furthermore, Oracle noted that it may have other AI-related advantages. If large language models become commoditized to a certain extent, then an enterprise's ability to incorporate and inference against its own proprietary, non-public data would be extremely valuable. Since many large enterprises' data resides in Oracle databases, Oracle may offer significant value in the AI era.

Oracle's transition from a high-margin software business to a capital-intensive infrastructure business is creating real risk, but it's against a very large, high-growth opportunity. If Oracle can convince investors that the risks are diminishing while the opportunity remains vast, the stock could have one of the highest upsides among large-cap technology stocks.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group and Oracle. The Motley Fool has a disclosure policy.