Cash Flow Beats Backlog as Banks Brace for Earnings

Dear readers,

Investors have a simple test for the fourth quarter: show me the cash. Microsoft passes it and Oracle doesn’t, at least not yet. For the banks, the question is price, because valuation will decide who gets a tailwind into third-quarter results. Weak US labor market data has pushed fears of an October rate hike down to around 20 percent, which leaves room to look at individual stocks rather than the whole tape.

Microsoft vs. Oracle: Cash Flow Beats Backlog

Microsoft gained about 37.5 percent in the third quarter, adding roughly $1 trillion in market value. It was the stock’s best quarterly showing since 1998. The business backs it up. Azure grew 43 percent most recently, and the backlog rose 84 percent to $678 billion.

One more point sets Microsoft apart from its peers. Among the large AI spenders Alphabet, Amazon and Meta, it is the only one whose annual free cash flow has not turned negative. That holds despite capital expenditure of $115.9 billion in the fiscal year.

On Monday, Melius Research upgraded the stock to Buy from Hold with a $665 target. Analyst Ben Reitzes points to growing enterprise demand for AI security and governance solutions. The stock trades around $523, about 40 percent above its June low. Of the 72 analysts Bloomberg tracks, 69 rate it a buy, yet the average target implies only a little over 11 percent upside. This is a quality stock with little valuation cushion.

Oracle shows the other side. Its backlog stands at $664 billion, and cloud infrastructure revenue rose 121 percent to $7.39 billion in the first quarter. Free cash flow in fiscal 2026 was minus $23.7 billion, though, and for the current year Oracle caps net capital expenditure at $70 billion.

The stock has lost about half its value over twelve months and trades around $143. Director Stephen Rusckowski bought about $3.5 million of stock in late September at around $139, and 35 of 43 analysts recommend buying.

The bet is that Oracle converts its backlog into cash before investors run out of patience. That makes it a name for investors with a long horizon, not for short-term trading.

Open Text shows what the picture looks like without growth fantasy. Revenue rose only 1 percent in fiscal 2026, with core business up 3 percent and core cloud up 9 percent. The adjusted EBITDA margin was 37.1 percent.

The company repaid $649 million of debt over the full year and plans to hire more than 300 new sales staff. The stock is down about 30 percent year to date. Buyers here are betting on deleveraging and margin stability, not on momentum.

Schneider and PTC: The Buyer Pays the Bill

Schneider Electric wants to acquire US software company PTC for $205 per share in cash, valuing the equity at $22.6 billion. PTC shares jumped about 36 percent but, at around $196, still trade below the offer. Schneider lost almost 10 percent in Paris and stands at around €273.

The market is punishing the buyer for the price. Schneider, meanwhile, is paying for an entry into industrial software that shifts its business further toward recurring software revenue. For PTC shareholders, the gap to the offer is the price of regulatory risk and waiting time. Schneider investors must wait to see whether the integration justifies the premium.

Banks Ahead of Earnings: Price Targets Come Down

Ahead of third-quarter results, analysts are trimming price targets on the large banks. JPMorgan lowered its Bank of America target from $68 to $62 and its Citi target from $149 to $147.

Should investors sell immediately? Or is it worth buying Oracle?

JPMorgan’s own shares are feeling it too. BofA lowered its JPMorgan target to $400 from $420 and keeps a Buy rating. UBS cut its target to $395 from $400, also with a Buy rating.

The stock trades around $334 and is clearly down over the past month. Bank of America reports before the opening bell on October 14, with analysts expecting earnings of $1.16 per share.

The counter-thesis comes from Morgan Stanley. Analyst Manan Gosalia upgraded Wells Fargo to Overweight from Equal Weight and named it a top pick. The $102 price target signals a gain of 27 percent from Friday’s close.

His reasoning is that normalizing balance sheet growth should ease funding pressure and stabilize net interest margin. He also sees the stock as undervalued at 1.5 times 2027 tangible book value per share. Wells Fargo was up about 2.4 percent in Monday trading, at around $82.

On paper, Wells Fargo is clearly cheaper than JPMorgan, at roughly ten times 2027 earnings versus 13.2. What matters is net interest income. Management is aiming for about $50 billion for 2026, and if that guidance slips below $49 billion, the thesis would be damaged.

The next test comes from regional banks. PNC (October 15, consensus $4.89 per share) and Truist (October 16) will give first hints on net interest margins next week. At Truist, portfolio sales, including a $5.5 billion auto loan package, are weighing on the margin in the short term.

Uber, Delta and PepsiCo: What Else Lands This Week

Wells Fargo raised its price target on Uber to $92 from $89 and maintains an Overweight rating. At $68.11, the stock sits just above its 52-week low of $65.41. Wells Fargo forecasts fourth-quarter 2026 gross bookings of $64.9 billion, up 20 percent year over year excluding currency effects.

The risk is Waymo. Wells Fargo estimates its share of US ride volume at 3.6 percent in 2027, up from 1.4 percent in 2026.

PepsiCo (October 8) and Delta Air Lines (October 9) also report during the week. Delta has so far confirmed its adjusted 2026 earnings guidance of $6.50 to $7.50 per share.

Outlook

On Wednesday, the Fed meeting minutes and a ten-year US Treasury auction follow. US consumer prices arrive on October 14. Both will help decide whether the valuation discounts on banks persist.

The Takeaway

In software, companies that combine growth with free cash flow get paid, while those that only invest must deliver. Microsoft already has the cash flow but leaves little valuation cushion. Oracle offers a larger cushion but demands patience. Among banks, the gap between Wells Fargo and JPMorgan makes net interest income guidance the number to watch. Pick the setups where the price still leaves room for error.

Best regards,
The StocksToday.com Editorial