Generative AI is all the rage right now, leaving the "old" cloud computing industry wondering if it's now chopped liver. It's not.
While investors go wild over the explosive artificial intelligence (AI) movement set off by Nvidia's semiconductors, there's actually still plenty of growth still going on in the cloud and software-as-a-service industry that was all the rage during the 2010s through the early pandemic.
Oracle (ORCL 2.02%) CTO Larry Ellison said this week that all nine of Warren Buffett's Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) energy and utility companies are moving to Oracle Cloud. Here's what investors need to know.
What's a Warren Buffett utility, and why are they so far behind the hype?
Ellison's Oracle Cloud software announcement regarding Berkshire Hathaway isn't going to move Oracle stock these days. Nevertheless, the Berkshire name drop is significant.
The Buffett utilities in question are subsidiaries housed under the Berkshire Hathaway Energy (BHE) unit. They include PacifiCorp in the Western states, MidAmerican Energy in the Midwest, various electricity transmission and natural gas pipelines in North America, renewable energy assets like wind turbine projects, and Northern Powergrid in the U.K.
Collectively, BHE is a sizable business that generates ample cash flow to Buffett's investment holding enterprise. BHE reported earnings of $2.06 billion on $12.6 billion in revenue during the first half of 2023. These are big but boring energy businesses where generating cash is the name of the game, not pioneering shiny new computing technology.
Now what of this business with cloud software? Ellison said on Oracle's recent earnings call that "all nine utility companies owned by Berkshire Hathaway are in the process of replacing all their existing ERP systems and standardizing on Oracle's Fusion Cloud applications."
Cloud software was so 2010s. These days, AI is the rage. BHE appears to be way behind the curve, right?
More bullish signals for the cloud
ERP (enterprise resource planning) software is nothing new, not even for the cloud. Businesses like utilities use ERP to plan and measure the progress of projects and financial decisions. ERP tools usually span multiple departments within an organization to help coordinate financial planning.
The cloud and the massive amount of data it can help an organization unlock is particularly well suited to ERP. For example, as Ellison explained later on the call, work is being poured into automating tasks within ERP processes, like procurement (purchasing), the same way e-commerce services have helped automate purchasing for consumers over the last decade.
Likely BHE is finally deciding to replace its old non-cloud ERP software with Oracle's Fusion Cloud products. Why wait until 2023, though? For a big utility company, new systems and products need to be tried and tested. And they need to provide a very clear return on investment. There's no bonus points for being an early adopter if what you have still works.
In other words, the cloud is growing up, and it's reaching a point where businesses of all sorts -- even big, boring utilities -- see financial return for making the switch from legacy software. While AI steals the spotlight, the cloud industry is still very much in growth mode and could be gearing up for another run higher.
Tech researcher Gartner estimates software and data center spending will wind up being top-dollar priorities in 2023, but will actually accelerate in uptake in 2024. It forecasts about 13% overall growth for software in 2024 (compared to a 12% estimate for this year), and over 6% growth for data centers (less than 4% this year) over 2023 levels.
Oracle is but one big cloud software provider that could benefit from companies like Berkshire Hathaway that are finally ready to take the plunge. While many investors are hyperfocused on AI, top cloud stocks are still very much en vogue and deserve your attention right now.
