What happened
Shares of database and cloud company Oracle (ORCL 2.02%) fell 12% in the month of September, according to data from S&P Global Market Intelligence.
Oracle released its fiscal first-quarter earnings during the month, which set off the decline. Coming into September and into the announcement, Oracle had rallied to an all-time high on the back of artificial intelligence (AI) enthusiasm. However, while growth was still solid across its portfolio, it didn't quite live up to the hype -- or analyst expectations.
So what
Throughout the year, Oracle had positioned itself as an ascendant AI player, along with the other three major cloud infrastructure stocks. Since last year and through early 2023, the company highlighted its close partnership with Nvidia, being one of the first clouds to offer Nvidia's DGX platform and other cloud-based services.
So, expectations were high heading into the month. But while Oracle beat earnings-per-share expectations, revenue came in a little lighter relative to Wall Street's estimates. Revenue was up just 8.7% on the year, a marked deceleration from the 18% growth in the prior quarter.
Looking under the hood, all of Oracle's segments decelerated relative to the prior quarter. The biggest slowdown was in its cloud software, which was up just 17%, versus the prior quarter's 47% growth. However, a lot of the slowdown was likely due to lapping a full quarter of revenue from Cerner, the health information-technology company Oracle bought in June of 2022.
Meanwhile, the cloud infrastructure segment, where Oracle hopes to challenge the big infrastructure-as-a-service players in the AI age, grew an impressive 64% in constant currency. However, that also decelerated, though mildly, from the prior quarter's 77% growth. And infrastructure only made up around 12% of Oracle's total revenue base.
The majority of the company's revenue still comes from its core database business, which is transitioning from on-premises to the cloud, along with other back-office applications and enterprise resource planning products that the company has acquired along the way. Those are good businesses, but Oracle is already a massive, mature player, and it's facing competition from new cloud upstarts.
Given the stock's rise year to date, it was perhaps not surprising to see it pull back on relatively underwhelming numbers.
Now what
After the earnings release, some analysts defended the company, noting that the some of the revenue miss came from its legacy on-premises business and smaller hardware business, which are not nearly as important as cloud infrastructure and software.
Others pointed to the fact that Oracle is still integrating Cerner, and is in the process of migrating Cerner's business to the cloud. That can cause revenue to bounce around, as larger up-front licenses migrate to cloud subscriptions.
Overall, Oracle's quarter didn't seem like anything to panic about, especially since the stock was up so much in the beginning of the year. It generates lots of free cash flow and is cheaper than a lot of other software-as-a-service stocks.
But two things investors should watch are if other cloud companies get more competitive in the database segment, and if Oracle can viably compete in cloud infrastructure, coming from a distant fourth place.
