The U.S. economy has a rich history of producing the world's most valuable enterprises. In 1901, United States Steel became the first company in the world to amass a $1 billion valuation. The 123 years since have been filled with more incredible milestones, including Apple becoming the first $1 trillion company in 2018.
Apple now stands alongside Microsoft and Nvidia in the $3 trillion club. Amazon, Alphabet, and Meta Platforms have also become trillion-dollar giants since Apple blazed the trail in 2018. But I think another company is on track to join them by the end of this decade. Oracle (ORCL 1.84%) is experiencing red-hot demand for its artificial intelligence (AI) data center infrastructure, and its stock just soared to a new all-time high.
Oracle is a $383 billion company as of this writing, so if it joins the $1 trillion club by 2030, investors who buy the stock today could earn a hefty gain of 161%. Here's why I think it will happen.
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Oracle built some of the world's best AI infrastructure
Oracle was founded in 1977 and is a tech-sector pioneer. It originally developed some of the world's best database management software before helping its business customers prepare for the age of the internet in the late 1990s and early 2000s. Then, it moved into the cloud computing industry to provide the data center infrastructure and digital applications businesses need to thrive in the modern economy.
Oracle Cloud Infrastructure (OCI) is a go-to destination for AI developers. Its data centers are filled with advanced graphics processing chips (GPUs) from top suppliers like Nvidia, specifically designed to develop AI models.
While that sounds similar to what many other data center operators offer, Oracle built unique RDMA (random direct memory access) technology that allows data to move from one point to another significantly faster than competing Ethernet networks. In practice, this means developers can train their AI models far more quickly, and since they often pay for computing capacity by the minute, this translates to substantial cost savings.
Plus, unlike other data centers, Oracle's Gen2 Cloud infrastructure is automated, allowing the company to bring new locations online quickly without having to hire and train employees. This drives costs down but eliminates human error, which means the Gen2 architecture is more secure. Data is the nectar of any AI model, so protecting it is vital for every developer.
Oracle's low-cost, high-performance data centers are now used by leading AI start-ups like Cohere, Elon Musk's xAI, and, thanks to a recently signed deal, ChatGPT creator OpenAI. Oracle's infrastructure is also used by other tech giants, like Microsoft, Alphabet, and even Nvidia.
Oracle can't keep up with demand
Oracle is building data centers as quickly as it can, but it's struggling to keep up with demand. During the fourth quarter of fiscal 2024 (ended May 31), the company generated $14.3 billion in total revenue, representing a year-over-year increase of just 3%. But there's more to the story than the sluggish headline number.
First of all, the OCI segment specifically generated $2 billion in revenue, up an impressive 42% from the year-ago period, making it the fastest-growing part of the entire organization.
Secondly, Oracle had a record $98 billion worth of remaining performance obligations (RPOs) at the end of the quarter, which basically represents its order backlog. That was up 44% year over year and included $12.5 billion worth of new AI deals from 30 customers. Simply put, there is a line around the block of AI companies waiting for new Oracle data centers to come online, and it's growing longer each quarter.
Management says around 39% ($38.2 billion) of those RPOs will convert into revenue over the next 12 months, which speaks to how quickly Oracle is building more infrastructure. If that number proves accurate, the company says it should return to double-digit percentage revenue growth during the current fiscal 2025 full year.
But it gets better: CEO Safra Catz says there are many more deals in the pipeline, which means RPOs might continue growing even faster than Oracle can fulfill them.
NYSE: ORCL
Key Data Points
Oracle's (mathematical) path to the $1 trillion club by 2030
Oracle delivered $5.56 in non-GAAP (generally accepted accounting principles) earnings per share during fiscal 2024. So, based on its current stock price, it trades at a price-to-earnings (P/E) ratio of 25. That's a discount to the 30.9 P/E ratio of the Nasdaq-100 index, which implies Oracle is much cheaper than its big-tech peers (on average).
If Oracle's P/E ratio rose 23.6% from here to trade in line with the P/E of the Nasdaq-100, that would carry the company's market capitalization to $473 billion. For its market cap to reach $1 trillion by the end of this decade, Oracle's earnings per share would have to climb by 11.3% annually to reach $11.76 in calendar year 2030 (assuming its P/E ratio remains constant).
Oracle's earnings growth fell short of that in fiscal 2024, coming in at just 8.6%. But remember, that was partly due to the company's inability to meet demand for its data centers. When supply eases in fiscal 2025 and drives an acceleration in revenue as Catz expects, Oracle's earnings should follow. Plus, the high degree of automation in Oracle's data centers should expand the company's gross profit margins over time, which could further accelerate its earnings growth.
Wall Street's early forecast for fiscal 2025 points to earnings growth of 11.3%, which will put the company on track. But even if Oracle doesn't achieve a $1 trillion market cap over the next seven years, the incredible demand for its AI infrastructure should catapult the company into the trillion-dollar club over the longer term.
