Shares of companies that are benefiting from the proliferation of artificial intelligence (AI) have been soaring in 2024. This is evident from the terrific gains clocked by the likes of Nvidia, Palantir, Arm Holdings, and Super Micro Computer, among others.
Some of these names have seen a parabolic jump in their shares thanks to their improving AI credentials. Oracle (ORCL 0.85%) is one company that seems set to hop on the AI bandwagon and could go parabolic too.
Let's see why that may be the case.
Oracle's AI credentials got a big boost following its latest earnings report
Shares of Oracle are up 21% so far this year, but the stock got a major boost last week following the release of its fiscal 2024 third-quarter results on March 11.
NYSE: ORCL
Key Data Points
The stock shot up over 11% in a single session as investors cheered the company's better-than-expected revenue and earnings for the three months ended Feb. 29, 2024. Oracle, which is known for providing database software to enterprises, saw robust growth in its cloud revenue last quarter thanks to the growing demand for AI applications.
Cloud revenue jumped 25% year over year to $5.1 billion, while overall revenue was up 7% to $13.3 billion. Non-GAAP earnings surged 16% to $1.41 per share. Oracle is forecasting revenue growth of 4% to 6% in the current quarter.
While that may not look very exciting at first, CEO Safra Catz pointed out in the press release that Oracle's remaining performance obligations (RPO) jumped 29% year over year to a record $80 billion, driven by "large new cloud infrastructure contracts" signed during the quarter. RPO refers to the total value of a company's future contractual obligations, so faster growth in this metric as compared to Oracle's revenue suggests it's winning new business that could supercharge its future results.
What's more, Catz added that Oracle could "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 datacenters very, very rapidly." This capacity expansion will allow Oracle to serve more than 40 new AI-related bookings worth over a billion dollars that it received last quarter.
It's also worth noting that Oracle is now looking to push the envelope in the cloud AI infrastructure market by adding new generative AI features that will serve multiple verticals ranging from sales, marketing, and human resources to finance and supply chain. In all, Oracle claims its cloud infrastructure offers more than 50 generative AI use cases to customers.
That explains why customers have been flocking to its cloud-based AI offerings and driving solid growth in Oracle's business. The company's cloud revenue grew at a faster pace than Amazon Web Services' 13% year-over-year growth in the previous quarter and was in line with Google Cloud's 25% growth. The company's robust revenue pipeline indicates it could end up giving Microsoft Azure -- which saw 30% cloud growth last quarter -- a run for its money as well.
Investors should note the cloud AI market could grow from just $43 billion in 2022 to a whopping $887 billion in 2032. Oracle, therefore, seems to be at the beginning of a major growth curve.
Investors are getting a good deal on the stock right now
Oracle stock is currently trading at 6.7 times sales, while its trailing price-to-earnings (P/E) ratio sits at 33. For comparison, technology stocks in the U.S. have an average sales multiple of 7.1 and a P/E ratio of almost 45. What's more, Oracle's forward P/E ratio of just 18 also represents a discount to the Nasdaq-100's forward earnings multiple of 28 (using the index as a proxy for tech stocks).
Analysts also expect Oracle's earnings growth to accelerate each year through fiscal 2026.
Data by YCharts.
The company's fast-growing AI business could even help it exceed Wall Street's earnings expectations. But assuming Oracle's earnings jump to $7.11 per share in fiscal 2026 and it trades at 31 times trailing earnings at that time (in line with the Nasdaq-100), its stock price could jump to about $220 per share in the next two years. That would be a 70% jump from current levels.
However, if the market decides to reward Oracle with a higher valuation on the back of its improving AI prospects, the stock may be able to sustain its recent pop and go parabolic. That's why investors looking for a promising AI stock that's trading at an attractive valuation right now would do well to buy Oracle before it surges higher.
