After its last earnings report and subsequent jump in share price just a few months ago, Oracle (ORCL 1.41%) co-founder Larry Ellison surpassed Bill Gates on the list of the world's richest people. But Oracle's latest earnings report came up shy of many investors' expectations, and the premium-valuation reward doled out in June is now being reversed a bit in September.

This is all quite silly, though, because Oracle's cloud segment is still sizzling and lifting the old software giant higher overall. Adding Nvidia's (NVDA 1.44%) latest and greatest AI tech before its largest peers was the secret. Is it time to buy the dip in the stock?

Oracle's secret sauce in "Cloud Wars: Part 2"

For much of the 2010s, Oracle Cloud didn't even exist. It made its debut in 2016 with little fanfare, with all the focus on cloud infrastructure pioneer Amazon's (AMZN -0.29%) AWS, as well as fast-growing Microsoft (MSFT -0.25%) Azure and Alphabet's (GOOGL -0.27%) (GOOG -0.28%) Google Cloud taking the other two podium positions.

But Oracle Cloud has been steadily gaining traction, in no small part by landing an early deal to get its hands on Nvidia's (NVDA 1.44%) latest generative artificial intelligence (AI) servers last autumn. It followed that by being the first to launch Nvidia's DGX Cloud AI training subscription service in March 2023.

Ellison, once a cloud critic, is now fully on board with IT infrastructure that's based on remote data centers in this new era of generative AI. On a recent earnings call, he said that "AI development companies have signed contracts to purchase more than $4 billion of AI training capacity in Oracle's Generation2 Cloud," and that Elon Musk's new start-up xAI "has signed a contract to do training in Oracle's Gen2 Cloud."

Oracle Cloud's ascendence over the last seven years has been impressive. Though its annualized revenue is still about half that of third-place Google Cloud, it just posted the fastest growth rate of the public cloud-computing platforms in its fiscal 2024 first quarter (ended in August 2023). 

Cloud Provider

Revenue Growth (YOY) for
Q2 of Calendar 2023

Annualized
Revenue Run Rate

Oracle Cloud*

29%

$18.4 billion

AWS

12%

$88.4 billion

Microsoft Azure

26%

$55 billion-plus

Google Cloud

28%

$32.1 billion

Data sources: Amazon, Microsoft, Alphabet, and Oracle. YOY = year over year. *Oracle Cloud includes the Cerner acquisition and is for the quarter that ended in August.

Much like every other tech giant, Oracle isn't a cloud-computing pure play, so its fast progress is being diluted by other, older software business lines. Overall revenue increased just 9% to $12.5 billion last quarter.

But more important than the top-line number, earnings per share (EPS) increased 54% year over year to $0.86, and free cash flow increased 21% to $5.66 billion.

Time to buy the stock?

Management remains confident that its cloud infrastructure will remain in high-growth mode in the year ahead. But the overall outlook didn't get the Nvidia AI boost some investors were hoping for. The second quarter of its current fiscal year (which ends in November) is expected to bring total revenue growth of just 5% to 7%, including a small boost from favorable currency exchange rates.

Cloud-specific revenue is expected to be up 29% to 31% next quarter, accounting for all of Oracle's expansion and offsetting weakness in its older software lines.

Bear in mind that part of the sharp slowdown is due to the acquisition of healthcare software giant Cerner last summer now being fully lapped. And Cerner is also migrating its old software licenses over to cloud-based ones. Old software licenses meant up-front revenue, versus cloud contracts being paid over time, so that also causes revenue recognition that slows growth.

On an adjusted basis, EPS is expected to be up 7% to 11% year over year. For an old software company, none of this is bad, but Oracle stock was due for a sell-off after all the AI hype this year. Even after the big earnings jump last quarter and subsequent stock tumble, shares still trade for a hefty 33 times trailing-12-month EPS.  

Oracle's early bet on generative AI has elevated it back onto lists of top software companies again. But as I've stated before, I'm personally on hold at the moment. With overall growth hitting a slowdown and shares still trading for a premium, I'm not buying. However, Oracle remains on my watch list.