While software and database giant Oracle (ORCL -0.61%) was late to the cloud computing party, the company is taking advantage of the generative AI boom to carve out a potentially lucrative niche.
Oracle's results for the fiscal third quarter, which ended on Feb. 29, beat expectations by only a slight margin. However, the company's progress in the cloud got investors excited despite sluggish growth in other areas.
Riding the AI wave
Oracle has positioned its cloud infrastructure business to go after artificial intelligence workloads. Demand for AI computing capacity is soaring, driven by both established companies and an ever-increasing number of AI start-ups. Those startups aren't yet locked into other cloud providers such as Amazon Web Services.
Oracle's cloud infrastructure revenue shot up 49% year over year in the third quarter to $1.8 billion, growing more than three times as quickly as the company's cloud software business. Oracle expects that its cloud infrastructure business will remain in "a hypergrowth phase" for the foreseeable future.
Oracle is building out its data center footprint to accommodate soaring demand, but it hasn't been fast enough. CEO Safra Catz noted in the third-quarter earnings call that the company had 40 AI bookings that have yet to come online because the capacity isn't yet up and running.
Slow growth elsewhere
Oracle's progress winning AI workloads and growing its cloud infrastructure business impressed investors in March, so much so that sluggish growth in other areas has been largely ignored. Cloud license and on-premise license revenue slumped 3% in the third quarter, hardware revenue was down 7%, and services revenue sank 5%.
Cloud application software revenue was up 14%, although some of this figure consisted of existing customers migrating to the cloud. Total revenue grew by 7%, hardly the kind of rapid-fire growth being reported by other cloud giants, such as Microsoft.
Is Oracle stock a buy?
Following the rally in March, Oracle is valued at roughly $342 billion.
Analysts expect Oracle to report revenue of $53.25 billion and adjusted earnings per share of $5.59 in its current fiscal year. Using those estimates, Oracle stock trades for over six times sales and roughly 22 times earnings.
There's one big question investors must ask themselves: Will Oracle's fast-growing cloud infrastructure business end up anywhere near as profitable as its core software business? Cloud infrastructure can be lucrative, but with Oracle focusing on AI workloads that require reams of expensive AI accelerators, it may take quite a while for the profit to start flowing.
Oracle investors are right to be impressed by the company's burgeoning cloud infrastructure business, but they shouldn't ignore the rest of the business.
