Oracle (ORCL 2.02%) may not be among the esteemed ranks of the "Magnificent Seven" tech stocks, but the database software kingpin has a long track record of delivering superior returns to investors.
Since its initial public offering (IPO) in 1986, the stock has appreciated by an incredible 158,000%, remarkably turning $1,000 into roughly $1.59 million today.
More recently, Oracle's returns haven't been too shabby either. The enterprise software giant has beaten the S&P 500 solidly over the last decade, as well as the last three and five years, but the stock fell after its second-quarter (ending November 2023) earnings report disappointed investors.
Revenue in the quarter grew just 5% to $12.94 billion as the company transitions from traditional on-premise solutions to cloud-based ones. Its largest segment, cloud services and license support, grew 12% to $9.63 billion, but its three other segments experienced declines.
On the bottom line, the company's performance was more impressive as the cloud business offers higher margins than on-premise. Adjusted earnings per share increased 11% to $1.34, which beat estimates by a penny. For the third quarter, the company forecast revenue growth of 6% to 8% and adjusted earnings per share up 10% to 14%, to between $1.35 and $1.39.
Investors were underwhelmed by the modest revenue growth and guidance, and the stock fell 12.4% on the news. However, there's more to the story.
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Oracle's AI business is ramping up
Looking beyond the headline figures shows key parts of Oracle's business are growing much faster than the company overall.
Its cloud infrastructure division saw revenue jump 52% to $1.6 billion, and overall cloud revenue rose 25% to $4.8 billion. CEO Safra Catz noted on the earnings call that margins from the cloud infrastructure business improved substantially as the company fills new data center capacity.
The other thing investors need to understand about Oracle's growth is that it's still constrained by the supply of its data centers, which it's rapidly expanding to meet what it called "exploding demand." The company is currently building 100 new cloud data centers and expanding 66 of its existing cloud data centers, or the majority of what it already has.
Demand is being driven in large part by new generative artificial intelligence (AI) technologies that require enormous computing power, which has led to a shortage of graphics processing units (GPUs) that have affected a number of companies, including OpenAI. That's a sign that Oracle is well positioned to benefit from the AI bonanza that investors are so excited about, but it will take time to build out that capacity.
The company's remaining performance obligations (RPOs) are now $65 billion, the equivalent of more than a year's worth of total revenue.
Additionally, Oracle's new partnership with Microsoft seems to be paying off, as Chief Technology Officer Larry Ellison said on the call that Microsoft just ordered 20 cloud data centers to meet demand for Azure. Azure is the only other hyperscaler to offer Oracle Cloud Infrastructure Database Services besides Oracle.
Why Oracle's a buy on the dip
Oracle stock is down 21% from the peak it reached earlier in 2023, but the company appears to be in a stronger position than ever as it ramps up spending on data centers. As the success of Amazon Web Services and Microsoft Azure show, cloud infrastructure businesses are highly profitable at scale and these tend to be sticky relationships, especially for customers that are running Oracle database software in Oracle's case.
Revenue growth and profits should rise over the coming years as it builds out those data centers and capitalizes on excess demand, and as Oracle Cloud Infrastructure (OCI) becomes a larger percentage of the business. The stock also looks well priced at a price-to-earnings ratio of around 20 based on adjusted earnings.
Investors would be wise to take advantage of the dip and scoop up shares of Oracle. After the latest update, the company looks positioned to be among the leaders in AI stocks.
