Oracle Corporation's (NYSE:ORCL) Intrinsic Value Is Potentially 69% Above Its Share Price

In this article:

Key Insights

  • Oracle's estimated fair value is US$242 based on 2 Stage Free Cash Flow to Equity

  • Oracle's US$143 share price signals that it might be 41% undervalued

  • The US$148 analyst price target for ORCL is 39% less than our estimate of fair value

How far off is Oracle Corporation (NYSE:ORCL) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Oracle

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$8.84b

US$13.2b

US$17.1b

US$25.4b

US$31.5b

US$36.1b

US$40.0b

US$43.4b

US$46.2b

US$48.7b

Growth Rate Estimate Source

Analyst x15

Analyst x14

Analyst x6

Analyst x1

Analyst x1

Est @ 14.53%

Est @ 10.88%

Est @ 8.33%

Est @ 6.55%

Est @ 5.30%

Present Value ($, Millions) Discounted @ 7.5%

US$8.2k

US$11.4k

US$13.8k

US$19.0k

US$22.0k

US$23.4k

US$24.1k

US$24.3k

US$24.1k

US$23.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$194b