Oracle (ORCL 0.29%) has long had a leading position in enterprise IT. It's known for having the world's top relational database management system as well as cloud infrastructure, enterprise software, and the Java computing language.
However, as a stock, Oracle largely disappointed over the last decade. Revenue has been mostly flat until a recent surge, and the stock underperformed the Nasdaq and most of its big tech peers over the last 10 years.
This year has been a different story for Oracle, with the stock surging on rapid growth in its cloud infrastructure division thanks in large part to artificial intelligence (AI). Even after a pullback on its fiscal first-quarter earnings report due to a deceleration in cloud growth, the stock is still up 39% year to date as revenue growth significantly improved.
Here's what co-founder Larry Ellison had to say about the breakthrough technology in the latest earnings release:
"Is Generative AI the most important new computer technology ever? Maybe! Self-driving cars, molecular drug design, voice user interfaces -- billions of dollars are being invested in AI. As of today, AI development companies have signed contracts to purchase more than $4 billion of capacity in Oracle's Gen2 Cloud. That's twice as much as we had booked at the end of Q4."
Oracle Cloud Infrastructure revenue grew 66% in the first quarter, trouncing peers like Amazon Web Services and Microsoft Azure, though Oracle's cloud infrastructure business is significantly smaller, bringing in $1.5 billion in revenue in the recent quarter.
Image source: Getty Images.
Oracle's position in AI
Ellison, one of the godfathers of the modern software industry, sees huge potential for generative AI and for his company's cloud computing service thanks to demand for the new technology. The company is ramping up spending on the chips it needs to power its Gen2 Cloud.
At a conference in June, Ellison said that Oracle is spending billions on GPUs from Nvidia and three times that on CPUs from Advanced Micro Devices and Ampere, a chipmaker in which Oracle owns a stake. Clearly, the company sees a huge opportunity.
Ellison also said in the earnings release, "The largest AI technology companies and the leading AI start-ups continue to expand their business with Oracle for one simple reason -- Oracle's RDMA (Remote Direct Memory Access) interconnected Nvidia Superclusters train AI models at twice the speed and less than half the cost of other clouds."
Unlike many of the companies touting the importance of AI, Oracle is actually seeing direct benefits from it as growth in cloud infrastructure revenue has accelerated from a year ago on strong demand. Revenue from Gen2 cloud infrastructure jumped 72% in the first quarter.
The company is also integrating generative AI features across its enterprise software suite and forged a partnership with large language model start-up Cohere, adding further reason to bet on it in AI.
Oracle is also benefiting from a close partnership with Nvidia. The leading AI chipmaker chose Oracle Cloud Infrastructure (OCI) as the first hyperscale cloud provider to host its AI supercomputing service, Nvidia DGX Cloud.
Is Oracle stock a buy?
Oracle is much more than just its cloud infrastructure business; in fact, that segment contributed less than 12% of revenue in its last quarter.
It still has legacy divisions that are declining, and it is seeing headwinds from Cerner, the healthcare IT company it acquired last year, as it transitions Cerner to the cloud.
However, the company's future seems squarely focused on AI. And even with those slower-growth businesses, its revenue growth still edged out Microsoft and Alphabet in the most recent quarter, and Oracle is cheaper at a price-to-earnings ratio of 20.
Oracle stock sold off Sept. 12 as the company called for decelerating revenue growth in the second quarter at 5% to 7%, or 8% to 10% excluding Cerner. Cloud revenue is expected to grow 29% to 31%, matching the 30% rate in the first quarter.
The company will have to execute on the Cerner acquisition, but the stock could re-rate since an increasing part of the business belongs to the cloud division, which -- including cloud applications -- makes up more than a third of revenue.
If Ellison's predictions about generative AI are correct, the stock could soar as Oracle emerges as one of the winners in the AI boom.
