It's the season for big technology events, and even old software giant Oracle (ORCL -0.39%) is getting in on the action. At its recent CloudWorld event, Oracle CEO Safra Catz was joined by Nvidia (NVDA 3.71%) CEO Jensen Huang to renew the companies' long-standing collaboration and announce new integrations.
Paired with the accelerating growth it showed off in its latest earnings, Oracle's expansion with Nvidia makes it look like an exciting tech stock again. But is it really? One of these two companies has more to gain from this relationship, and I don't believe it's Oracle.
Oracle gets some help from a new friend
Oracle has been putting in a lot of work into its cloud infrastructure services in recent years, and it's starting to pay off. In the first quarter of Oracle's fiscal 2023 (the three months ended Aug. 31, 2022), the company said its infrastructure-as-a-service (IaaS) revenue increased 52% year over year to $900 million. Together with its integrated software-as-a-service (SaaS) products, the segment increased 45% in Q1 to $3.6 billion.
As a result, Catz and the management team said overall revenue was up 18% year over year. This is by far the fastest Oracle has grown in years.
There's a little more to the story, though. Remember that Oracle just completed the acquisition of healthcare software giant Cerner back in June. Excluding the addition of Cerner, Oracle's overall revenue increased 8% year over year in Q1 (when also excluding the impact of negative currency exchange rates) -- still its fastest rate in some time, but not a double-digit increase.
I mention this because the deal with Nvidia sounds exciting, and it is -- but it might not be as exciting for Oracle as it is for Nvidia.
Oracle and Nvidia team up in the cloud
Back to Oracle CloudWorld. Catz and Huang announced that Oracle Cloud Infrastructure (the IaaS business that's growing at a brisk pace) will be "adding tens of thousands more Nvidia GPUs" to its tech hardware service. This will come in the form of Nvidia A100 and the new H100 cloud computing accelerator servers, which don't come cheap. The H100 will reportedly be somewhere in the ballpark of $30,000, though purchasing in bulk will likely reduce Oracle's cost.
Additionally, Nvidia software built atop these cloud servers will also be made available via Oracle Cloud. Included is the full suite of artificial intelligence (AI) software Nvidia packages as AI Enterprise, early access to Nvidia Rapids (for cloud data processing), and Nvidia Clara (for healthcare). Clara is being used in conjunction with Oracle's new prize Cerner to accelerate development of new healthcare tools.
What Oracle gets vs. what Nvidia gets
On the surface, this looks like a collaboration between Oracle and Nvidia, but this is a relationship tilted in favor of Nvidia. Sure, Oracle gets some new toys to bolster its tiny but aspiring-to-be-mighty cloud IaaS department. But Oracle is playing the part of sales and distributor for technology Nvidia built. What's really happening is Oracle is buying a bunch of Nvidia GPUs and software so it can arm its marketing team with new AI capabilities. And that's OK. Oracle is great at sales and distribution.
But let's be clear on who will get the lion's share of growth and profit. At 19% of revenue in Q1 fiscal 2023 (up 17% year over year), Oracle's largest operating expense is sales and marketing. Oracle's cloud service and licensing support expenses have also been increasing rapidly, which cost 15% of revenue and were up 43% year over year last quarter. This is in part due to Oracle expanding its services to other clouds, which speaks volumes to where Oracle is at these days. It recently announced its cloud database software tools would be available directly on Microsoft Azure and Amazon Web Services.
In addition to paying Nvidia for its technology, Oracle is also paying Azure and AWS for direct access to those leading cloud platforms. All of this adds up to compressing Oracle's profit margin in recent quarters -- though Cerner is expected to provide a profit boost as it is more fully integrated into Oracle later in fiscal 2023.
Data by YCharts.
Compare that with Nvidia. Huang is a fan of building brand new things, not replicating and then competing with a business that already exists. In other words, Nvidia is a research and development company. Through the first half of its fiscal 2023 (the six months ended in July 2022), Nvidia spent 23% of its revenue on research and development, and just 7.9% on sales and marketing. Why boost sales and marketing spend when companies like Oracle can do it for you?
Of course, Nvidia is dealing with its own challenges. Video game sales have slumped this year as consumer spending on PCs wanes and cryptocurrency mining (which often utilized off-the-shelf GPUs designed for gamers) falls off a cliff. But Nvidia's data center (read: cloud computing) segment is still firing on all cylinders. With all of that money being poured into research and development, Nvidia is still very much a growth company, and operating margin remains high.
Data by YCharts.
Here's another interesting tidbit: Using enterprise value (EV, a measure of a company's true worth when factoring for cash and debt on balance) to free cash flow (FCF, a business's ability to generate cash), Nvidia and Oracle are priced similarly right now. In fact, Nvidia stock (49 times EV to trailing-12-month FCF) is now cheaper than Oracle (51 times EV to trailing 12-month FCF).
Neither stock is cheap, and Oracle could benefit from a rapidly improving profit margin as it integrates Cerner. But rapidly improving profits could simply justify the current stock price. In contrast, Nvidia is still very much a long-term growth story, and it's also lapping some headwinds negatively impacting its profitability.
Given current valuations, I'd hold the phone on Oracle stock. Nvidia isn't cheap, but that premium price tag is there for good reason if you're looking for a top bet on the cloud and AI.
