When you're discussing artificial intelligence (AI) stocks, you might think of Nvidia or Alphabet. But other companies are also set to benefit from AI proliferation.
Oracle (ORCL -1.44%) is one of those businesses and has turned Oracle from a boring stock to a top performer. But have investors missed the boat on Oracle? Or is there more room to go? Let's find out.
Generative AI has been a business boost for Oracle
Oracle has long been known for its enterprise resource planning (ERP) software. This software is vital in essentially any manufacturing-focused business and built Oracle into the size it is today. However, after companies rapidly adopted this product, it was left with no growth levers, as it could barely manage a mid-single-digit growth rate after the country emerged from the Great Recession.
ORCL Revenue (Quarterly YOY Growth) data by YCharts.
Lately, one of Oracle's product lines has been getting a lot of buzz: AI and cloud computing. This product has translated directly into sales thanks to a huge interest in generative AI. Chief technology officer and Oracle founder Larry Ellison said:
"Oracle's Gen2 Cloud has quickly become the No. 1 choice for running Generative AI workloads. Why? Because Oracle has the highest performance, lowest cost GPU cluster technology in the world. Nvidia themselves are using our clusters, including one with more than 4,000 GPUs, for their AI infrastructure."
That's high marks for a product if one of the industry's AI leaders is using your product.
In the fourth quarter of fiscal year 2023 (ended May 31), Oracle saw revenue growth of 17%, capping an outstanding FY 2023, which saw 18% revenue growth. This new wave of business, thanks to its AI and cloud computing wing, is something the stock desperately needed, and investors have responded in kind, as the stock is up over 40% in 2023.
But, with that large movement, has the stock become too expensive?
The stock was once undervalued but no longer holds that title
Long-term Oracle shareholders may have a different opinion on the stock, depending on when it was purchased. If it was bought at the height of the tech bubble in 2001, it took 14 years for the stock to reach a new all-time high. However, if it was bought in 2003 after the market bottomed, you're up nearly 1,000%, beating the S&P 500 by nearly 600% and toppling the Nasdaq by about 60%.
Even over the past five years, Oracle has been a great stock, nearly doubling the S&P 500 and Nasdaq. Still, all of that outperformance came during the last nine months after Oracle's cloud computing division started reporting outstanding results.
Furthermore, Oracle benefited from a low starting point. At its October 2022 lows, the stock traded for a mere 12 times forward earnings. For a stock whose three-year average price-to-earnings (P/E) ratio was 21 prior to October 2022, that left room for massive upside.
However, its undervalued catalyst is complete, as the stock currently trades at 21 times forward earnings and 31 times trailing earnings. Now, Oracle must deliver market-beating results to maintain its strong returns.
Unfortunately, Oracle may not be able to do that. For the first quarter, Oracle expects its revenue to rise by 8%, even though cloud revenue is expected to grow by 30%. Non-GAAP (adjusted) earnings per share (EPS) growth is also not all that impressive, as it is expected to rise about 11%. Looking forward to the rest of FY 2024 and FY 2025, Wall Street analysts only expect 8% revenue growth, disappointing values for those considering Oracle as an investment.
So with Oracle's growth slowing, investors need to be careful, as Oracle may have had its one shining moment. While the company will still remain stalwart and can anchor a portfolio, it isn't the bargain buy it once was. However, it's a great company to keep on your watchlist if the valuation declines again, as Oracle's products are critical in business infrastructure worldwide.
