Artificial intelligence (AI) has brought out some unlikely candidates as top investments. Oracle (ORCL -0.61%) has quietly become a leader in the space, and its stock has done tremendously well, as it has nearly doubled since October 2022.
But how did this sleeping giant become one of the best performers after years of underperformance? Let's find out.
Oracle has seen incredible demand for its cloud product
Oracle has long been known for its enterprise resource planning (ERP) software system. This product is necessary for any manufacturing business, as it handles planning, material purchases, and other aspects vital to ensuring a well-flowing manufacturing process.
However, one area Oracle is less known for is its cloud computing. Oracle offers on-site and cloud data center infrastructure, which has seen mass adoption in the industry over the past few years. However, the data center buildout is far from complete, leaving plenty of upside for Oracle to continue expanding.
Among Oracle's clients is the AI leader itself, Nvidia. Oracle founder and chief technology officer Larry Ellison stated that Nvidia uses Oracle's products because they have the "highest performance, lowest cost GPU cluster technology in the world." Its infrastructure allows its clients to add up to 32,000 graphics processing units (GPUs) in one cluster, which is good enough to make some of the world's most powerful data centers.
This massive growth driver for Oracle is seen as a primary reason to invest in the stock. In the fourth quarter of fiscal year 2023 (ending May 31), cloud infrastructure revenue rose 76% year over year, with cloud revenue as a whole rising 54%. That's incredible growth for a company the size of Oracle, but it takes a backseat to Oracle's total revenue growth of 17%.
When a third of your company is growing by 54%, yet overall growth is only 17%, that indicates the other segments are doing quite poorly. Furthermore, Oracle's growth is expected to slow significantly in FY 2024.
Total cloud revenue is expected to grow about 29% in the first quarter, a substantial decrease from Q4's figure. For the full year, Wall Street analysts expect Oracle to grow its revenue by 8.3% and 8.1% next year.
That's not market-beating growth, especially considering Oracle has a strong cloud computing segment. But is there still value in Oracle's stock?
A cheap stock added to Oracle's run-up
Part of Oracle's run-up was due to a rock-bottom forward price-to-earnings (P/E) ratio of nearly 12 times earnings.
When you have strong business results intermingled with a low valuation, you get a strong-performing stock. Unfortunately, it makes it difficult to determine the true catalyst: Business or valuation.
Now that Oracle has returned to a forward P/E ratio of 21, it's fairly valued for a company that's growing at the pace it is. Without an undervaluation catalyst, investors must rely on Oracle's lackluster growth to drive stock performance.
With that in mind, I don't think Oracle can become a great investment moving forward unless it blows expectations out of the water. However, investing in the hope that a company will drastically exceed expectations isn't smart, and you'd be better off looking at investments with a track record of market-beating growth.
It has taken Oracle over a decade to grow greater than 10%, and one or two quarters of greater growth doesn't change the trend.
ORCL Revenue (Quarterly YoY Growth) data by YCharts
While Oracle has a great product, it's too levered to other business segments that aren't growing nearly as fast. As a result, I think investors are better off avoiding Oracle stock and looking at other large-cap tech names.
