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Oracle Corp (ORCL) stock has tumbled since releasing earnings on Dec. 9 for its fiscal year ending Nov. 30. But the company generated strong FCF and ORCL stock looks at least 16% undervalued here. Based on our FCF analysis ORCL could be worth over $190 per share.
ORCL was at $164.00 in midday trading on Tuesday, Jan. 21, down $27.69 or 14.5% from its recent high of $191.69 on Dec. 6, right before releasing its fiscal Q2 earnings.
It's almost as if the market thinks the company is in trouble - but it isn't. Oracle generated strong free cash flow (FCF), which I pointed out in my Dec. 22 Barchart article, “Oracle Stock Is Off Its Highs and Could Be Cheap Here.”
I also suggested selling short out-of-the-money (OTM) cash-secured put options as an income play and setting a lower buy-in target. That play worked out well and can now be repeated.
What ORCL Stock Could Be Worth
In my Dec. 22 article, I showed that ORCL stock could be worth as much as $197.31 per share. Here is a synopsis.
I used the company's recent free cash flow (FCF) margin results and an FCF yield metric to set this price target.
For example, Oracle reported that its operating cash flow grew 19% YoY on a trailing 12-month (TTM) basis. Moreover, its TTM FCF margin on sales was 17%.
So, using analysts' revenue estimates we can project future FCF using an estimated 18% FCF margin:
$64.94 billion (May 2026 sales est.) x 0.17 = $11.04 billion FCF est.
Next, using its historical FCF yield metric of 2.0% (which is the same as multiplying by 50x), Oracle could be worth over $500 billion:
$11.04 billion / 0.02 = $552 billion
That is 16% higher than its present $476.86 billion market cap:
$552b / $476.86b = 1.1576 -1 = +15.76%
In addition, Oracle has been buying back about $2.4 billion of its shares outstanding. That works out to about one-half of one percent. That implies that ORCL stock could be worth at least 16% more, or over $190 per share.
$164 x 1.16 = $190.24
Analysts Agree
Moreover, analysts tend to agree that ORCL stock is undervalued. For example, Yahoo! Finance reports that 35 analysts' average target price is $196.55. That is 20% higher than today.
In addition, Barchart's survey shows a mean analyst price target of $194.68, or over 18.7% higher.
Moreover, AnaChart.com, which tracks analysts' price recommendations over time, shows that the average of 26 analysts is $176.14. That is still at least 7.4% higher.
As a result, the average of these surveys' price targets is $189.12. That is close to my $190 price target using FCF margin analysis.
One way to play this is to sell short out-of-the-money (OTM) cash-secured put options. This works best for nearby expiry periods.
This allows investors to set a lower buy-in price target and still get paid while waiting. It also gives existing shareholders a way to make extra income as they wait for ORCL stock to rise to its price target.
Shorting OTM Puts
In my last article, I suggested shorting the $160 strike price put option that expired on Jan. 17. At the time, ORCL was at $169.99, so the strike price was over 5.6% below (i.e., out-of-the-money) the trading price.
Since the premium received was $1.28, this play provided a cash-secured short put investor an immediate 0.80% yield (i.e., $1.28/$160.00). Since ORCL closed at $161.03, this play remained out-of-the-money (OTM) at the expiration close. That means the investor had no obligation to buy 100 shares at $160.00.
It makes sense to repeat this cash-secured short-put play. For example, look at the Feb. 21, 2025, expiry period. It shows that the $160.00 strike price premium is now at $1.68 on the midprice.
That provides the short seller with an immediate yield of 1.05% (i.e., $1.68/$160.00).
That means that any investor who secures $16,000 in cash with their brokerage firm can earn $168.00 shorting this put. That is 1.05% of the $16K invested in this play.
In other words, unless the stock falls to $160.00 in the next month, the investor will not have the $16K cash assigned to buy 100 shares at $160.00 per share. In any case, the investor still keeps the $168.00 over that period.
As a result, the investor's breakeven price is actually $160.00 - $1.68 income received, or $158.32. That is 6.87% below today's price.
The bottom line here is that ORCL stock looks cheap, given its FCF margins and analysts' price targets. One way to play this is to sell short OTM puts.
