There's been no shortage of winners in the artificial intelligence (AI) boom thus far.
The launch of ChatGPT has set off a new race in technology as big tech companies and start-ups are racing to tap into the power of generative AI and realize its potential.
While investors are probably familiar with Nvidia and big tech players such as Microsoft, one of the major players in the AI boom might surprise investors. That's Oracle (ORCL 2.02%), the legacy database software giant.
Oracle's cloud infrastructure business has been booming as a result of the ramping-up demand to run AI applications such as ChatGPT, and that trend was on display in the company's recent fiscal third-quarter earnings report, as the stock jumped 11% on Tuesday.
Oracle's overall revenue grew just 7% to $13.3 billion, which matched estimates, while adjusted earnings per share rose 16% to $1.41, ahead of expectations at $1.38. However, the cloud infrastructure was the real star of the quarter, as revenue in that segment jumped 49% to $1.8 billion, significantly outgrowing competitors such as Amazon Web Services (AWS), Google Cloud, and Microsoft Azure. Revenue at its cloud software segment grew 14% to $3.3 billion, and Oracle's backlog, measured by remaining performance obligations, jumped 29% to $80 billion, showing the company has a year and a half of orders to fulfill at its current revenue run rate.
The company continues to see demand for its AI infrastructure outstripping supply, as it's opening new data centers as quickly as it can.
Oracle has worked closely with Nvidia and Microsoft in its data center buildout, and it's outgrowing competitors by offering a lower-cost cloud computing alternative because of its reputation for security and because its clustering technology, built on Nvidia Superchips, is well suited for processing artificial intelligence workloads.
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Oracle's cloud advantage
Oracle is smaller than competing cloud infrastructure companies such as Azure, AWS, and Google Cloud, but Oracle Cloud Infrastructure has some important differences.
Oracle is known for its advanced security features, and it also offers a new service called Oracle Alloy, which was introduced in late 2022 and enables any Oracle cloud partner to become a cloud provider itself and add extra services as needed.
Those two features give the company an advantage in the sovereign cloud, selling to governments and other buyers with national interests. On the earnings call, co-founder and Chief Technology Officer Larry Ellison explained how Alloy was helping attract sovereign customers, noting that the company's contract with NRI, which runs the Tokyo Stock Exchange, is attracting interest from its peers in Japan, which Ellison hopes will help it penetrate that market.
Alloy is a unique product in the cloud infrastructure market, and Ellison noted that neither Azure, AWS, nor Google competes for that business.
To hammer his point home, he says: "The demand for our cloud regions is extraordinarily high. I believe we will end up -- this is a funny prediction, but OK, we'll end up with more data centers and cloud regions than all the other hyperscalers combined."
That's a bold prediction, but it's a reflection of the tremendous demand the company is seeing and its unique ability to fill it. If it's true, the stock should be a big winner.
Is Oracle stock a buy?
Oracle's overall growth is likely to remain moderate at best, as cloud growth is weighed down by legacy businesses, but investors shouldn't ignore the disruptive potential of its cloud business because of AI. The tech giant also added $15 billion to its backlog, which was more than its revenue in the quarter, showing that demand is indeed outpacing supply.
Oracle has unique strengths that are allowing it to take market share from its cloud infrastructure peers, including its cost-effectiveness, flexibility through Alloy, reputation for security, and close relationship with Nvidia.
As the cloud business grows, overall revenue should accelerate as well, and margin should expand as the cloud business scales.
With a huge demand pipeline in front, Oracle looks like a promising AI stock to own over the coming years.
