Software giant Oracle (ORCL 2.02%), best known for its widely used database and enterprise applications, was a late arrival to the cloud infrastructure market.
Compared to market leaders Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud, Oracle is still barely worth mentioning. The company generated $1.8 billion in cloud infrastructure revenue in the quarter ending on Feb. 29, less than one-fifth of what third-place Google Cloud produced in its latest quarter.
While Oracle remains far behind today, surging demand for computing capacity aimed at artificial intelligence workloads could shift the balance of power. Oracle's cloud infrastructure business is growing rapidly, with revenue soaring 49% year over year in the latest quarter, driven in part by overwhelming demand for AI.
A big bet on AI
Oracle is up against established, entrenched competitors in the cloud infrastructure market, but AI computing capacity is proving to be an issue for start-ups and enterprises alike. There are only so many high-powered Nvidia GPUs and other AI accelerators to go around.
Oracle is plowing capital into expanding its cloud computing capacity with a particular focus on AI. The company has so far been unable to keep up with demand, which has put a lid on its growth rate. Oracle plans to spend as much as $7.5 billion on capital expenditures in the current fiscal year, many times higher than its annual spending a few years ago.
ORCL Capital Expenditures (TTM) data by YCharts
One tidbit from the company's earnings call gives investors an idea of how much AI business Oracle is winning. CEO Safra Catz said this in response to a question about revenue recognition: "We've got at least 40 new AI bookings that are over a billion that haven't come online yet."
Catz added in the earnings release: "We expect to continue receiving large contracts reserving cloud infrastructure capacity
because the demand for our Gen2 AI infrastructure substantially exceeds supply--despite the fact we are opening new and expanding existing cloud data centers very, very rapidly."
Is Oracle stock a buy?
While Oracle is benefiting from the AI boom, cloud infrastructure remains a small part of its business. Overall revenue grew by 7% year over year in the latest quarter to $13.3 billion, with cloud infrastructure making up less than 14% of that total.
Cloud application revenue grew by 14% to $3.3 billion, while the segment that contains both cloud licenses and on-premise licenses saw revenue decline by 3%. Outside of cloud infrastructure and some cloud applications, Oracle's traditional businesses aren't putting up impressive results.
As the cloud infrastructure business grows as a percentage of overall revenue, Oracle's growth rate should expand. However, cloud infrastructure may not be as profitable in the long run as selling software licenses. That's especially true if AI demand unexpectedly slows, or if industrywide capacity catches up with and exceeds demand.
Oracle is not a particularly cheap stock. With a market capitalization of around $350 billion following a post-earnings rally, shares of Oracle trade for around 25 times the average analyst estimate for full-year adjusted earnings. Adjusted EPS is expected to decline slightly in fiscal 2024, with modest growth returning in fiscal 2025.
While Oracle stock doesn't look like a bargain, the company is clearly having success winning business for its AI infrastructure. If the company can keep up its sky-high growth rate in the cloud, the stock could certainly deliver solid returns in the years ahead.
