Oracle FQ1 and Adobe FQ3 – B Grade

Oracle FQ1 27 – Still B+

• Good results from Oracle were underpinned by rapid execution on infrastructure, but the company still has some way to go to prove that it can make a really good return on the contracts that it has.
• FQ1 revenue / Adj-EPS were $19.3bn / $1.92 ahead of estimates of $19.13bn / $1.74 driven mostly by cloud revenues.
• Cloud Infrastructure revenue was $7.4bn (up 121% YoY), driven by CPU and GPU revenues of $6.5bn up 151% YoY and database, which grew by 26% YoY.
• Oracle delivered 850MW of capacity during the quarter, and where it had renewals, it was able to increase pricing by 20%.
• The usual back-of-the-envelope calculation estimates that Oracle is now earning around $16bn/GW on the capacity that has deployed during the quarter (revenue increase of $1.7bn divided by average capacity added and annualised), which is almost exactly the same as last quarter.
• This is reasonable performance but nothing like the $37.7bn/GW that xAI is earning from Anthropic, implying that Oracle is being hemmed in by the early contracts it signed with OpenAI.
• Assuming the capacity was Grace Blackwell, this would give me a 5-year IRR of 18%, which increases if Oracle can keep the capacity running for more than 5 years.
• 18% is pretty good and above Oracle’s cost of equity, and this should rise over time as Oracle has been able to increase its prices on renewal.
• Guidance for FQ2 27 is reasonably good, with 30%-34% YoY revenue growth implying revenues around $21.4bn just ahead of consensus at $21.2bn.
• Cash flow, however, was not so great, as $28.5bn was spent on capex, leaving a $5bn shortfall that was paid for with the $20bn equity issuance.
• As long as Oracle can maintain these returns or improve them, then this is a good use of capital, but the industry may well overbuild capacity, which would leave Oracle in a difficult position.
• Things are going fairly well, but on 20x 2027 PER and many other less risky AI bets trading lower, I don’t think a position in Oracle makes much sense.

Adobe FQ3 26 – Upfront investment

• A pretty good set of results was sniffed at by the market as quarterly guidance came in just below the midpoint, even though full-year guidance was increased and the freemium strategy is already showing momentum.
• FQ3 26 revenues / Adj-EPS were $6.76bn / $6.13, slightly ahead of forecasts of $6.69bn / $6.08, but FQ4 guidance was very slightly light.
• Here, FQ4 revenues / Adj-EPS are expected to be $6.80bn – $6.85bn ($6.3bn) / $6.30 – $6.35 ($6.33), slightly behind expectations of $6.84bn / $6.31.
• This is mostly as a result of the freemium strategy, where Adobe is giving up some revenue now in order to demonstrate to users the value of its products and to entice them to subscribe.
• In a world where one can generate images for free using AI, this is a sound strategy, as free AI never really delivers quite what users want, giving Adobe an opportunity, but one that it has to fight harder for.
• However, FY guidance has increased marginally as a result of the good Q3 results which, combined with the fact that growth remains very much intact, is what is preventing a panicked sell-off.
• Adobe’s critics will immediately say that this tiny miss is the first sign of the SaaSpocalypse, but I do not agree.
• There is no sign of enterprises leaving Adobe and, with a number of major client wins during FQ3 and 13% YoY revenue growth, the story looks intact to me.
• Freemium users have passed 100m, up 70% YoY, which creates a funnel for upgrades in the future, and the AI-related parts of the business are growing very strongly.
• However, the market is somewhat nonplussed by the appointment of the new CEO, which has led to the departure of the head of its largest business, creating more management uncertainty.
• This is less of a risk than the market thinks because Adobe does not really need a new strategy, as all it has to do is keep executing on the strategy that it already has.
• This is why a boring appointment to CEO does not matter very much, in my opinion, as long as he can continue to execute and keep growth chugging along.
• With consensus adj-EPS for 2027 at $27.48, Adobe is trading on 8.9x 2027 PER which is a bargain for steady growth and ongoing share buybacks.
• I already have a large position in Adobe that I bought at $235, which I am happy to sit on.