Fed’s Interest Rate Drama Just Getting Started - Here’s Why Oracle Investors Should Be Thrilled

Wall Street's favorite rollercoaster is back—the Fed's interest rate circus has investors scrambling for cover. But while traditional markets brace for impact, Oracle's positioning tells a different story entirely.

The Cloud Infrastructure Play

Oracle's building something Wall Street analysts can't quantify with their spreadsheets—real infrastructure that doesn't care about Jerome Powell's next speech. Their global data center expansion coincides perfectly with the coming institutional migration to blockchain-based systems.

Enterprise-Grade Blockchain Integration

Forget the crypto bros—Oracle's quietly building the plumbing for Fortune 500 companies to onboard digital assets. Their enterprise blockchain solutions provide the security legacy finance craves while bypassing the regulatory quagmire that's choking traditional banks.

The Fed-Proof Revenue Stream

While bank stocks swing with every FOMC whisper, Oracle's cloud division keeps printing money. Their hybrid cloud approach lets corporations dip toes into decentralized tech without going full crypto—the perfect gateway drug for institutional adoption.

Oracle's playing chess while the Fed plays checkers. Their infrastructure bets position them as the silent winner in the coming financial system overhaul—because when the music stops on easy money, you want to own the chairs, not just dance.

Image source: Getty Images.

Oracle's a big stock

Oracle Corporation is one of America's biggest tech companies. With a market capitalization of $877 billion, Oracle earned $12.6 billion on $59 billion in revenue over the last 12 months, with about 86% of revenue coming from the provision of database software hosted on the cloud.

These are very large numbers. They value Oracle at more than 71 times trailing earnings (which is a lot), and nearly 15 times annual sales. Granted, analysts forecast a fast earnings growth rate of nearly 20% annually for Oracle. But even so, it's hard to argue that Oracle is anything but a very expensive stock.

Except for one thing.

Oracle's a big stock with a bright future

Software is Oracle's biggest business today. But as time goes on, Oracle will become more and more an artificial intelligence company -- with Open AI as its biggest customer.

Two weeks ago, Oracle inked a $300 billion deal to lease server capacity to OpenAI to support the latter's AI services. Stretched over a five-year timespan, the deal promises to grow Oracle's new AI business alone to about $60 billion per year -- a sum larger than all the revenue Oracle gathers across all of its businesses, combined, today.

In other words, this single contract will double Oracle's revenue in five years' time. It basically guarantees Oracle a 20% growth rate, even if the rest of the company's businesses stop growing entirely.

That's before we even consider the effect of Oracle (maybe) taking a huge stake in TikTok.

Oracle's bright future comes at a price

However, there's one wrinkle Oracle must iron out for this to happen. As The Wall Street Journal pointed out last week, in order to enjoy the future revenue that OpenAI (and TikTok) promise to bring, Oracle must first make "substantial investments in its network infrastructure" to support all the data that will be coursing through it.

Oracle has already been making pretty "substantial investments" in its AI capacity. We know this because, according to data from S&P Global Market Intelligence, as recently as 2023, Oracle was generating nearly $12 billion in annual free cash flow. But last year, that FCF number turned negative -- not because operating cash FLOW decreased (in fact, it increased 11%, to $20.8 billion), but because capital spending more than tripled to $21.2 billion over the course of a year.

Result: Capital spending outstripped operating cash flow, and Oracle began burning cash for the first time in 35 years.

2024 may have been the first time this happened, but according to the Journal, it won't be the last. Indeed, citing Wall Street analysts, the paper predicts that Oracle will burn "nearly $29 billion" over the next three years, turning FCF-positive again only in 2029.

Why Oracle investors should love low interest rates

This means Oracle will rapidly burn through the $11 billion it currently has in the bank, and probably need to add to its debt load, which currently stands in excess of $111 billion.

Servicing that debt load already costs Oracle $3.6 billion a year in interest expense. Adding another $18 billion (for example) to the debt load WOULD therefore logically increase the company's interest costs by about 16%.

However, if interest rates fall from 4.25% to 4% to 3.75% to 3.5% by the end of this year, the net effect of all those cuts would be to reduce Oracle's interest expense by 18%. So, thanks to the Federal Reserve cutting interest rates, Oracle can probably raise all the new debt it needs to fund its expanding artificial intelligence business -- and save money in the process.

The Fed's interest rate cut couldn't possibly have come at a better time for Oracle.