Artificial intelligence (AI) minted its first $1 trillion company last year when Nvidia stock rose 239% on the back of incredible demand for its AI data center chips. Nvidia is now worth more than $2.2 trillion, making it the third-largest company in the world behind Microsoft and Apple. Amazon, Meta Platforms, and Alphabet (Google's parent company) are also members of the $1 trillion club, and each company is working on AI in its own unique way.
But I think AI could soon propel Oracle (ORCL 2.60%) to a $1 trillion valuation, too. It operates industry-leading AI data center infrastructure, and the company is building capacity at a record pace because it simply can't keep up with demand. As of this writing, Oracle is valued at $350 billion, so investors who buy the stock today will see roughly a 185% gain if the company joins the $1 trillion club.
NYSE: ORCL
Key Data Points
Oracle is a leader in AI infrastructure
Founded in 1977, Oracle is one of America's oldest technology companies. It developed revolutionary database management software back then, before helping its business customers prepare for the internet age in the late 1990s and early 2000s. The company created Oracle Cloud Infrastructure (OCI) in 2016 and has since delivered hundreds of digital services to those businesses to migrate their operations online.
Now, using Nvidia's latest graphics processing units (GPUs), Oracle is focused on delivering the best data center infrastructure for AI workloads. Three months ago, Oracle told investors it was expanding 66 of its existing data center regions and building 100 more to meet demand.
Chairman Larry Ellison says Oracle's GPU cluster technology allows businesses to develop generative AI models twice as fast and for half the cost of other cloud providers. As a result, demand for its latest Gen2 Cloud capacity is skyrocketing. Oracle is able to keep costs down because its data centers rely on automation, which means there is little difference in operating costs between running 10 data centers and running 100. That also enables the company to build and scale them quickly.
In a conference call with investors for the fiscal 2024 third quarter (ended Feb. 29), CEO Safra Catz said Oracle has at least 40 new AI bookings worth more than $1 billion each that haven't even come online yet. In other words, they are waiting for additional infrastructure to be built.
Oracle can't keep up with demand
Oracle generated $13.3 billion in total revenue during Q3, representing a year-over-year increase of 7%. While that sounds like a sluggish growth rate, revenue for OCI surged 49% to $1.8 billion, and revenue for Gen2 Cloud specifically (within OCI) grew by 53%.
While OCI only accounts for 13.5% of Oracle's total revenue right now, those growth rates will ensure it becomes a much larger piece of the pie in the near future.
Oracle's total AI bookings across its business topped a record $80 billion in Q3, marking a 29% increase from the year-ago period. As you can see, bookings grew four times faster than the company's revenue during the quarter, which is evidence of the enormous demand for computing capacity the company is struggling to fill.
At the bottom line, Oracle's Q3 earnings per share jumped 25% to $0.85, which also outpaced revenue growth. It was thanks, in part, to careful cost management, with operating expenses increasing just 4% year over year. But it was also thanks to a substantial increase in gross profit margin on the infrastructure side, which is a natural consequence of scale. Oracle expects continued improvement as more of its new data centers come online.
Image source: Getty Images.
How Oracle could become a $1 trillion company
AI is the main point of focus for Oracle at the moment, but there's another opportunity worth mentioning. The company now has two Oracle Alloy data center regions online, which organizations can use to deliver their own cloud services to their customers -- without having to manage the infrastructure.
Oracle has planned five more Alloy data center regions, meaning capacity could soon triple. It's just another example of this company's long-standing commitment to innovation.
According to Wall Street, Oracle is on track to generate $53.4 billion in revenue in fiscal 2024 (ending May 31), placing its stock at a price-to-sales (P/S) ratio of 6.6. That falls between the valuations of other cloud giants, like Amazon (P/S ratio of 3.1) and Microsoft (P/S ratio of 13.2).
Assuming Oracle's P/S ratio remains constant, the company would have to generate $151.5 billion in annual revenue to justify a $1 trillion valuation. It could get there within a decade if its revenue grows by 11% annually.
While Oracle is growing more slowly on a quarterly basis right now, its revenue increased by 22% last fiscal year. Plus, Ellison believes OCI revenue will increase by more than 50% for years to come, which could drive an acceleration in the company's top line overall as the segment grows larger.
Remember, Oracle is in the process of more than doubling its data center footprint, and its bookings just soared by 29% in a single quarter. Bookings are expected to convert into revenue eventually, implying revenue growth will likely accelerate in the near future.
AI is the greatest financial opportunity Oracle has ever pursued, and I think it's the company's ticket to a $1 trillion valuation within the next 10 years.
