Perhaps it's time to start taking old tech giant Oracle (ORCL 0.22%) more seriously in the public cloud market. While cloud infrastructure providers like Microsoft Azure and Amazon Web Services continued to report slowdowns in growth to kick off 2023, Oracle's cloud platform is sizzling. This has helped with a resurgence of growth. Shares are up some 40% in the last year, bringing Oracle stock close to all-time highs last reached in late 2021.
How is Oracle suddenly enjoying such success? And is it too late to buy?
Oracle Cloud gets some help from an acquisition
Oracle's stock performance over the last few years has been supercharged. Zoom out and subtract the last three years, and you can see that Oracle was mostly a sleepy tech stock in the 2010s. What changed?
Data by YCharts.
The key to its resurgence has been Oracle Cloud Infrastructure (OCI) -- yes, another public cloud provider -- as well as Oracle cloud software, which often gets bundled into a package with infrastructure services for customers. Oracle said total cloud revenue totaled $4.1 billion in the three-month period that ended in February 2023, up 45% year over year.
But remember much of this growth is due to Oracle's massive acquisition ($28.3 billion, to be exact) of healthcare industry software giant Cerner last summer. Excluding the $600 million in revenue in the last quarter from Cerner, as well as negative headwinds from currency exchange rates, Oracle's combined cloud business grew at a more modest 28% year-over-year pace. Come June of this year, though, Oracle won't get the bump in growth from Cerner anymore, since the acquisition was finalized over the summer of 2022.
Using the "Oracle playbook"
Also bear in mind that Oracle has been leveraging Nvidia's pioneering work with high-performance computing chips and software. Oracle was the first to offer DGX Cloud, adding Nvidia's top GPUs to its own cloud infrastructure to beef up its appeal to customers. Oracle has been able to land some victories against its big-tech peers (again, like Microsoft Azure and Amazon AWS). One coup it pulled was nabbing Uber Technologies last quarter as the ride-hailing company migrates some of its workloads over to the more affordable Oracle Cloud Infrastructure ecosystem.
Indeed, Nvidia has helped level the playing field in cloud infrastructure, and cracked the door open for Oracle to wedge its foot into Azure and AWS' pantry. Let's not take too much away from Oracle here, though. Even fellow enterprise software maven Marc Benioff, CEO and co-founder of Salesforce, said he was adopting the "Oracle playbook." Oracle CEO Safra Catz is now borrowing the term when explaining the company's insistence on doing more with less, rather than pursuing growth at any cost.
In other words, Oracle isn't going to be the flashiest cloud stock out there, but that's OK. By the second half of 2023, expect revenue growth to moderate once the company is done lapping the pre-Cerner acquisition. At that point, I'd expect overall (cloud and noncloud) revenue growth to return to high-single-digit- or low-teens-percentage growth over the long term, with earnings and free cash flow per share averaging just a slightly higher growth rate.
The stock currently trades for 33 times trailing-12-month earnings (or 37 times free cash flow), and 20 times one-year forward expected earnings. Given the fact Oracle's pace of expansion is set to moderate, it's not a particularly compelling buy in my book at this point. However, given the company's fast and steady cloud expansion in recent years, it's certainly worth putting on watch if you'd forgotten about this top software giant of yesteryear.
