Can Oracle sustain its gross margin growth into 2026?

Oracle's gross margin growth may face challenges in sustaining its current trajectory into 2026. Here's why:

1. Declining Trend: Oracle's gross margin has shown a declining trend over the past few years. The average decline per year is approximately -2.4%. This trend suggests that the company's gross margin is under pressure, which could make it difficult to sustain growth into the future.
2. Current Performance: As of the latest data, Oracle's gross margin is at 70.63%, which is relatively high compared to the recent past. However, this does not necessarily indicate a strong foundation for future growth.

3. Market Conditions: The technology sector, including Oracle's cloud and software-as-a-service (SaaS) offerings, is highly competitive. The company faces significant competition, which can put pressure on margins as it invests in pricing strategies to remain competitive.
4. Strategic Investments: Oracle's investment in cloud infrastructure and AI is driving demand for its services, as evidenced by the significant increase in remaining performance obligations (RPO) to $130 billion. While this is a positive indicator for revenue growth, it may strain margins in the near term as the company expands capacity to meet demand.
5. Financial Health Concerns: Despite strong revenue growth, Oracle's margins and free cash flow remain a concern. These financial health indicators are crucial for sustaining investments in growth initiatives, and any deterioration could impact the company's ability to support future margin growth.
6. Dividend and Valuation: Oracle's dividend yield remains attractive, which could be a sign of strong financial health. However, the company's high P/E and P/B ratios suggest a premium valuation compared to earnings and book value, respectively. This could indicate that investors are expecting future growth to sustain the current valuation, which in turn puts pressure on the company to deliver.
7. Long-Term Outlook: Oracle's long-term forecast for 15% revenue growth by 2026, potentially accelerating to 20% by 2027, is based on strong cloud demand and a massive backlog. While this outlook is positive, it assumes that the company can manage the challenges posed by capacity constraints and margin pressure.

In conclusion, while Oracle's strategic investments and strong backlog provide a positive foundation for revenue growth, the company's declining gross margin trend, competitive pressures, and financial health concerns suggest that sustaining gross margin growth into 2026 may be challenging. Oracle will need to carefully manage its investments, pricing strategies, and operational efficiency to ensure that it can maintain or improve its gross margins in the coming years.