Oracle (ORCL 0.05%), one of the world's largest database software companies, was often considered a slow-growth tech giant. But over the past three years, its stock has more than doubled as it dazzled investors with the robust growth of its cloud business.
Could Oracle's stock head even higher over the next three years? Let's take a fresh look at its business to find out.
Image source: Getty Images.
Why did Oracle impress its investors again?
Over the past decade, Oracle transformed many of its on-premise database applications into cloud-based services to keep pace with its rapidly growing cloud competitors. It also expanded its cloud ecosystem with more enterprise resource planning (ERP), healthcare information technology (IT), and infrastructure services.
As a result, the growth of Oracle's cloud-based services offset the slower growth of its on-site applications, and its revenue and earnings per share (EPS) had compound annual growth rates (CAGR) of 3% and 5%, respectively, from fiscal 2014 to fiscal 2024 (which ended in May 2024). It also bought back more than a third of its shares over the past decade.
What happened to Oracle over the past three years?
Here's how Oracle fared over the past three years. Its EPS dipped in fiscal 2022 as it lapped a big one-time tax benefit in fiscal 2021, but its profits soared higher over the following two years. Its revenue growth accelerated significantly in fiscal 2023, but most of that growth can be attributed to its takeover of the healthcare IT giant Cerner.
|
Metric |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|
|
Revenue growth |
5% |
18% |
6% |
|
EPS growth |
(47%) |
27% |
21% |
Data source: Oracle.
Most of Oracle's recent growth was driven by its cloud infrastructure platform, which helped companies store their data and manage their AI workloads; its ERP services, which helped companies manage their employees and processes more effectively; and the growing usage of its cloud-based database services. Those businesses continued to expand even as the macroeconomic headwinds drove many companies to rein in their software spending.
Its total cloud services rose 22% in fiscal 2022, 29% in fiscal 2023 (excluding its acquisition of Cerner), and 26% (also excluding Cerner) in fiscal 2024. That robust growth consistently offset the weaker performance of its on-premise software.
What will happen to Oracle over the next three years?
Oracle's cloud infrastructure platform (OCI) is becoming its core growth engine. It's still tiny compared to Amazon Web Services (AWS) or Microsoft Azure, but it already serves massive customers like Nvidia, Uber Technologies, and ByteDance's TikTok. It's also rolling out more features for hosting and accelerating generative AI workloads.
The secular growth of the AI market should drive more companies to store their data on its databases. The company's leading position in the database market should continue to support the growth of its AI-focused cloud infrastructure services. It will also likely keep expanding its ecosystem with acquisitions even as it buys back more shares.
From fiscal 2024 to fiscal 2027, analysts expect revenue and EPS to have a CAGR of 12% and 20%, respectively. Based on those expectations, the stock might seem pricey at 32 times forward earnings, but its growth potential might justify that higher valuation. If the company matches those expectations, increases its EPS at a CAGR of 20% through fiscal 2029 (ending in May 2029), and keeps trading at 30 times forward earnings, its stock might rise 65% to $280 in calendar 2028.
That wouldn't be as impressive as Oracle's previous three-year run, but it could be a reliable way to profit from the secular growth of the cloud and AI markets. It should also remain less volatile than other higher-growth tech stocks.
