Oracle's (ORCL 2.02%) stock has been interesting to watch in 2023. The stock had risen more than 50% year to date but cratered 13% after the company reported earnings on Sept. 11. Oracle had been such a great story before that, but was the earnings report really that bad? Or is it time to abandon ship on Oracle stock?
Let's dive in and see if it's too late to benefit from Oracle's rise, or if this is a buying opportunity.
Cloud computing has allowed Oracle to beat the market
Oracle has been one of the pinnacle "old-school" tech stocks. Its enterprise resource planning (ERP) software has been the bedrock of this company for some time, as it's software that nearly every manufacturing business needs to run effectively. The problem is that once every company adopts it (or one of its competitor's offerings), there's not much expansion left.
This plagued Oracle for some time until Oracle's cloud infrastructure product took off. This product competes with the cloud computing giants like Amazon and Microsoft, but Oracle is no slouch. Among its clients list is Nvidia, the AI leader. Because Oracle claims "the highest performance, lowest cost GPU cluster technology in the world," it is ideal for cloud workloads focused on high-performance computing like AI, which heavily depends on GPUs (graphics processing units).
Cloud computing allowed Oracle to become a market-beating stock over the past five years, as its stock has a total return of nearly 150% compared to the S&P 500's 70%. But the market is catching on.
No longer an undervalued stock
Part of Oracle's impressive rise has come from multiple expansion. Multiple expansion occurs when investors are willing to pay more for a company because of future expectations. In the 2019 and 2020 time frame, investors had no confidence in Oracle and only valued the stock around 15 times earnings. However, after its cloud computing business took off, investors decided Oracle should be worth more.
ORCL PE Ratio data by YCharts
But, if Oracle fails to meet expectations, the premium that investors are willing to pay for the stock declines. That's exactly what happened after Oracle reported first-quarter fiscal-year 2024 results (ending Aug. 31).
Oracle's revenue only rose 9% in the quarter, which was less than what analysts were expecting. Furthermore, Oracle's Q2 guidance was pitiful, as revenue is only expected to grow 4% year over year. Few companies can grow at that slow pace while maintaining a premium valuation, so it makes sense why Oracle's stock valuation got hit.
Still, its cloud computing products excelled in the quarter. Cloud revenue comprised 37% of its total and grew at a 30% pace. But that's about where the strength stops, as other parts of Oracle's business have continued to struggle.
But is it too late to buy Oracle's stock? I'd say yes. Even though the cloud is doing very well for Oracle, the rest of the business is weak. With the multiple expansion catalyst complete, don't be surprised if you see multiple contraction over the next few years, which will cause the stock to move sideways if it continues posting lackluster results.
There are much better investments out there to gain exposure to cloud computing than Oracle -- ones that are cheaper and growing faster -- so I'd look there before considering an investment in Oracle.
