Over the last century, the U.S. economy has produced more of the world's leading companies than any other nation. Innovation has been key to that sustained dominance, because over time, different industries have evolved to create the most value.
- In 1901, United States Steel became the world's first $1 billion company.
- By 1955, the automotive industry was powering the economy forward, and General Motors became the world's first $10 billion company.
- By 1995, General Electric had built a conglomerate so large that it was selling everything from household appliances to aircraft engines. It rocketed up the value ladder, and became the first company ever to amass a $100 billion market capitalization.
- In 2018, the technology sector reigned supreme, and Apple rode the iPhone to become the world's first $1 trillion company.
Apple remains the largest company on Earth today, but it has since been joined by Microsoft, Amazon, Google parent Alphabet, and Nvidia in the trillion-dollar club.
A couple of new candidates are emerging thanks, in part, to their connections to artificial intelligence (AI), which is creating opportunities for companies to generate substantial amounts of value. One of those companies is tech giant Oracle (ORCL 2.25%), which has the potential to amass a $1 trillion market cap within the next decade, based on its historical growth rates and its leading position in the AI market.
Oracle is valued at just $310 billion today, so if I'm right, its stock could deliver a whopping 223% gain for investors who buy it today. Let's explore how it could happen.
NYSE: ORCL
Key Data Points
Oracle has a long history of tech-sector leadership
Oracle started out by developing database management software in the 1970s and 1980s. But it saw the age of the internet on the horizon, and it helped prepare its business customers for the online world throughout the 1990s. But its most important move came in 2016 when it established Oracle Cloud Infrastructure and built a solid position in the cloud computing industry.
The company has focused on serving businesses in the cloud ever since, offering them a large portfolio of ready-made online applications across every industry from financial services to retail. But thanks to artificial intelligence, Oracle could potentially unlock the greatest cloud revenue opportunity in its history. Businesses are racing to get their hands on AI-powered tools, thanks to their ability to boost productivity and transform customer experiences.
The cloud is where most companies store their data and run their operations, so it has also become the place where AI is developed, trained, and deployed. It requires centralized data centers equipped with powerful semiconductor hardware, and Oracle is working with Nvidia -- the leader in data center chips designed for AI workloads -- to deliver just that.
In fact, a few months ago, its co-founder and chairman Larry Ellison said Oracle has the highest-performance, lowest-cost graphics processing unit (GPU) cluster technology in the world. And in the recent fiscal 2024 first quarter (ended Aug. 31), he doubled down on those comments and said Oracle's interconnected Nvidia superclusters could train AI models at twice the speed, and at half the cost, of other cloud providers.
Oracle's innovation is driving new revenue opportunities
Ten years ago, cloud-related software and services accounted for just 20% of Oracle's total revenue. In the recent fiscal 2024 first quarter, that number was 83% (and growing).
And while the company only generated 8% revenue growth for the quarter on a year-over-year basis, the cloud remained a bright spot.
There were some incredibly impressive numbers beneath the surface of the headline revenue number. Cloud revenue generated from Oracle's infrastructure-as-a-service and software-as-a-service products combined came in at $4.6 billion, an increase of 30% compared to the year-ago quarter. That accounted for almost half of the company's overall cloud revenue, so it's an important growth driver.
But Oracle's cloud infrastructure revenue alone came in at $1.5 billion, up a whopping 66% year over year. It might get even better in future quarters because Ellison told investors that leading AI development start-ups had signed contracts to purchase $4 billion worth of capacity in Oracle's Gen 2 Cloud infrastructure. That number doubled from $2 billion just three months ago.
On its Q1 conference call, Oracle management told investors the company has about $65 billion in total bookings across its business. It said it has far more demand right now than supply, and its greatest challenge is building data centers as quickly as possible. As a result, its guidance for the upcoming second quarter points to overall revenue growth of just 7%, but the company said it is committed to delivering an acceleration later in the fiscal year.
Here's how Oracle could become a $1 trillion company
Despite what should only be a short-term slowdown in Oracle's revenue growth, the company has built a stellar long-term track record since becoming a public company in 1986. It generated $55 million in revenue that year, and in fiscal 2023 (ended May 31), that figure was $50 billion. That represents a compound annual growth rate of 20.2% over the 37-year period.
As I touched on earlier, Oracle is valued at $310 billion as of this writing. Based on its fiscal 2023 revenue, its stock trades at a price-to-sales (P/S) ratio of 6.2. Assuming that P/S ratio remains constant in the future, Oracle will have to generate $161 billion in annual revenue to justify a $1 trillion market valuation.
It could reach the milestone within a decade if it grows its revenue by 12.4% every year. If it grows its revenue at trend instead -- which is 20.2% per year -- Oracle could become a $1 trillion company in less than seven years.
However, given the pace at which its AI segments are growing, they could soon become a dominant part of Oracle's business and drive a potential acceleration in its overall growth rate. That could bring the company's entry into the trillion-dollar club even closer.
In any case, Oracle is a great candidate to join its tech peers Apple, Microsoft, Amazon, Alphabet, and Nvidia with a valuation of $1 trillion (or more). Investors willing to hold on to its stock for several years could see a 223% return on their money if it gets there.
