Technology is a ruthlessly competitive field where innovation is a constant existential threat. But some companies, like enterprise software giant Oracle (ORCL +0.55%), have stood the test of time.
Had you invested $1,000 into the company's initial public offering (IPO) in 1986, you'd be a millionaire with a $2.2 million fortune assuming you reinvested all your dividends over the years.
Artificial intelligence (AI) has seemingly become the technology industry's future. So can Oracle stay relevant, or should investors look for new dogs that can perform newer tricks?
Here is what you need to know.
NYSE: ORCL
Key Data Points
Oracle's tech roots go deep
Larry Ellison co-founded Oracle and built the company on database management software, starting in the late 1970s, when corporations had just begun using modern computers. Oracle has since expanded to various software and cloud applications, including enterprise resource planning (ERP), human capital management, customer relationship management, and more. Additionally, Oracle sells cloud computing and data center services, consulting services, AI and machine learning software, and hardware.
ORCL Revenue (TTM) data by YCharts
The diversified tech titan generates over $51 billion in annual revenue and $10 billion in free cash flow. Oracle can compete for and win huge corporate customers because it can package products and services to win business. Many of its products, such as ERP software, are sticky. They are tough to change once implemented, making Oracle a tough incumbent vendor to knock off once it's in.
According to Software Path, implementing new ERP software can cost a mid-sized business as much as $750,000, so this is not something most companies casually change. Oracle's brand recognition can also score points with decision-makers, as picking a lesser-known vendor can backfire harshly if it doesn't work.
AI tailwinds are blowing expectations higher
AI is a big software opportunity, and Oracle is seeing activity across its product portfolio. Oracle customers have access to AI software tools via its cloud marketplace, where they can purchase access to third-party products and services hosted on the company's cloud. Companies can access tools from Nvidia to train their AI models, Gemelo.ai for voice-based applications, Mosaic for machine learning, and more.
In Oracle's fiscal year 2024 Q2 earnings, Larry Ellison noted that demand for generative AI and cloud infrastructure has pushed its total remaining performance obligations (RPO) to $65 billion, exceeding annual revenue, signaling that growth is coming. Oracle is expanding 66 of its existing data centers and plans to build 100 new centers to accommodate demand.
ORCL PE Ratio (Forward) data by YCharts
Analysts responded to the news by bumping long-term earnings growth estimates over one percentage point to an annualized rate of 13.75%. Note that Oracle's expected long-term earnings growth was only mid-to-high single digits a few years ago. What's the takeaway? AI is proving to be a shot in the arm for Oracle's growth.
What can investors expect moving forward?
The rise in expected growth is impressive, but it's likely not enough to make up for overpaying for shares. Investors must be cautious with how much they pay. Today Oracle trades at 21 times its estimated earnings for the year ending May 2024. That's a PEG ratio of 1.5, which is roughly the limit investors can pay and still have some wiggle room in case Oracle doesn't perform up to expectations.
Oracle is also a dividend stock that yields almost 1.4%, and management has raised that dividend for 15 consecutive years already. Assuming Oracle performs to analysts' estimates and the valuation stays the same, investors could see annual returns averaging 14% to 15%. That won't make you rich overnight, but it is plenty to make shares worth buying and holding in a diversified portfolio.
Over time, look for the dividend to continue rising and AI momentum to remain strong. If that pans out, investors stand to do very well with Oracle.
