Artificial intelligence (AI) has been a boon for a number of businesses, including Oracle (ORCL 1.57%). AI energized the tech company's fortunes, sending its shares soaring 50% over the past 12 months through the week ending Feb. 21.
One factor that drove the stock higher is the company's participation in the U.S. government's Stargate program. This project plans to invest $500 billion into the nation's AI infrastructure, providing a tailwind to Oracle's revenue growth.
But the stock is down from the 52-week high of $198.31 reached in December. Does this present an opportunity to buy shares? Here's an analysis of the tech company to arrive at an answer.
NYSE: ORCL
Key Data Points
Factors in Oracle's AI success
Oracle has strengths that make it a compelling investment. Its origins lie in databases, which is where digital information is stored, including the data needed for AI. So its success in the AI sector is a natural extension of its roots.
But what ended up supercharging the AI business was its cloud computing infrastructure. Chief technology officer Larry Ellison said, "Oracle continues to win large AI training workloads because we're faster and less expensive than the other infrastructure clouds."
Artificial intelligence isn't like a software program that runs on your computer. After the AI model is built, it must be trained to make correct decisions by analyzing mountains of data stored in databases.
The training is costly, requiring an army of fast, powerful computers, such as the ones in Oracle's cloud. This has led businesses to use the company to train their AI.
Consequently, cloud revenue rose 24% year over year to $5.9 billion in its fiscal second quarter, ended Nov. 30. That strong performance helped the company's total second-quarter sales to grow 9% year over year to $14.1 billion.
Oracle's rising AI revenue
CEO Safra Catz says the company is experiencing a record level AI demand, and that its growth "will continue to climb even higher."
That's likely because Oracle captured Meta Platforms, which is investing aggressively in AI, as a customer in its fiscal third quarter, so the social media giant's revenue contributions aren't part of the second-quarter numbers.
Specifically, management anticipates fiscal 2025 revenue to grow by double digits over the prior year. That would be impressive considering fiscal 2024's $53 billion in sales, a 6% year-over-year increase.
Oracle's AI-fueled sales growth enabled it to increase fiscal second-quarter earnings per share (EPS) by 24% year over year to $1.10. This was the latest quarter of rising EPS since the AI boom began with the arrival of ChatGPT in late 2022, converting its success in the technology into gains for shareholders.
Data by YCharts; TTM = trailing 12 months.
However, that could change in upcoming quarters since management expects fiscal 2025 capital expenditures (capex) to double the $6.9 billion spent in 2024. To keep up with customer demand, Oracle is expanding its cloud infrastructure. One facility is so large, there are permits to build three small modular nuclear reactors to power it.
Although capex is rising, the company's financials give it the bandwidth to support this. Its operating cash flow over the trailing 12 months totaled $20.3 billion.
To buy or not to buy Oracle stock
Oracle's AI success and solid financials make the company a great investment. This leads to the question of whether now is the right time to buy shares.
One consideration is valuation. The company's price-to-earnings ratio (P/E) is the highest among some of its key competitors in the cloud computing space.
Data by YCharts.
This indicates Oracle shares are more expensive than the competition, suggesting its stock is still overpriced despite dropping from its 52-week high. So now is not the best time to buy. Wait for it to fall further before grabbing shares.
Alternatively, you can buy a few shares now and use dollar-cost averaging to build your position over time -- purchasing equal dollar amounts at regular intervals takes some of the guesswork out of which direction Oracle shares will go from their current price, while allowing you to own a piece of this successful AI tech company.
