Shares of Oracle (ORCL 0.44%) have underperformed the broader market in the past year, rising a modest 25% while the tech-laden Nasdaq-100 Technology Sector index has clocked gains of almost 45%. However, the provider of database and cloud services provider has shot into the limelight of late thanks to artificial intelligence (AI).
Last month, investors cheered Oracle's results from its fiscal 2024 third quarter, which ended Feb. 29. The database specialist not only delivered better-than-expected numbers, but also revealed a solid improvement in its revenue pipeline thanks to the growing demand for its AI solutions. However, will Oracle be able to capitalize on the AI opportunity, beat the broader stock market in the long run, and become a trillion-dollar company by 2030?
AI could accelerate Oracle's growth
In Oracle's fiscal 2018, it reported $39.8 billion in revenue. The company is expected to finish fiscal 2024 in a few months with a total revenue of $53.2 billion. That translates into a six-year compound annual growth rate (CAGR) of 5.6%. For the current fiscal year, Oracle is expecting a 6.6% increase in revenue.
However, Oracle's top-line growth rate is expected to improve over the next couple of years, hitting 10% in its fiscal 2026.
ORCL Revenue Estimates for Current Fiscal Year. Data by YCharts.
The growing adoption of cloud-based enterprise AI applications could help accelerate Oracle's growth beyond fiscal 2026. That's because the market for cloud-based AI services is set to grow rapidly from an estimated revenue of $43 billion in 2022 to a forecast $887 billion in 2032, according to researchers at Valuates Reports. The good news for Oracle investors is that this market has started moving the needle in a nice way for the company.
In its fiscal third quarter, Oracle generated $9.96 billion in revenue from its cloud services business -- an increase of 12% from the prior-year period. The segment now accounts for 75% of the company's total revenue compared to 72% in the year-ago quarter. However, this business's growth pace looks poised to accelerate, as Oracle's remaining performance obligations were up an impressive 28% year over year to $80 billion.
Oracle attributed this sharp increase to the "[l]arge new cloud infrastructure contracts" it signed during the quarter for its AI-focused Gen2 cloud infrastructure. It is worth noting that Oracle is witnessing stronger-than-expected demand for its Gen2 AI cloud infrastructure. That rising demand, which is outstripping its capacity, explained CEO Safra Catz in the earnings release, is why the company is "opening new and expanding existing cloud datacenters very, very rapidly."
Oracle's focus on building and expanding its data center infrastructure should eventually help it make the most of the cloud-based AI market in the long run. But will that be enough to lift Oracle into the trillion-dollar club?
What the long-term picture may look like
As mentioned, Oracle's revenue is expected to increase to $63.6 billion in its fiscal 2026, with the company exiting that year with a growth rate of just over 10%. Assuming Oracle's revenue continues accelerating and it can clock a CAGR of 12% over the five fiscal years that follow, its top line would jump to just over $112 billion in its fiscal 2031, which will end in mid-2030.
The companies in the U.S. technology sector average a price-to-sales ratio of 7.1. Assuming Oracle trades at a similar multiple in 2030, its market cap would then be about $796 billion. Now, that would be short of the $1 trillion market cap milestone, but it also suggests that Oracle stock could rise by 140% from current levels in that time frame. Moreover, if Oracle manages to clock faster growth thanks to its AI-related businesses, it could get closer to $1 trillion, or even exceed it.
Finally, as the company is trading at 6.5 times sales right now -- a discount to the tech sector's average -- buying this AI stock looks like a no-brainer. Oracle seems built for robust long-term upside thanks to its improving AI credentials.
