Oracle (ORCL +0.70%) is often considered a slow-growth tech giant, but its stock has still rallied more than 260% over the past 10 years. The database software leader impressed investors by expanding its cloud-based services, making smart acquisitions, and repatriating a lot of its overseas cash to repurchase more than a third of its shares.
Should investors still buy Oracle's stock after that impressive run? Let's review its business model and valuations to decide.
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What happened to Oracle over the past decade?
From fiscal 2014 to fiscal 2024, which ended last May, Oracle's revenue grew at a compound annual growth rate (CAGR) of 3% as its earnings per share (EPS) rose at a CAGR of 5%. It grew at a steady rate as it transformed many of its on-premise database applications into cloud-based services while expanding its cloud ecosystem into the enterprise resource planning (ERP), healthcare IT, and infrastructure services markets with acquisitions.
Those key acquisitions included ERP services provider NetSuite, construction project management services provider Aconex, and healthcare IT services giant Cerner. All of those companies lock their customers into sticky cloud-based subscriptions, and they funneled more data to Oracle's core databases.
It also expanded its own Oracle Cloud Infrastructure (OCI) platform, which carved out its own niche in the shadow of larger cloud platforms such as Amazon (AMZN +0.55%) Web Services (AWS) and Microsoft (MSFT 1.33%) Azure. It also made its own cloud-based databases compatible with AWS, Azure, and other cloud platforms.
NYSE: ORCL
Key Data Points
That transformation was expensive, but it helped Oracle keep pace with the seismic shift from on-premise software to cloud-based services. The reduction of taxes on overseas profit and repatriated cash in 2017 also enabled Oracle to bring back billions of dollars to the U.S., and it plowed a lot of that cash into its buybacks and dividends.
What will happen to Oracle over the next few years?
For fiscal 2025, Oracle expects to generate $25 billion in total cloud revenue. That would represent 43% of its projected revenue of $57.8 billion this year. It expects that ongoing expansion to be driven by the growth of the AI market, which is driving more companies to ramp up their spending on database and OCI services.
Its major AI customers already include Nvidia (NVDA +1.73%), Meta Platforms (META 1.18%), OpenAI, xAI, and Cohere. During its latest conference call, Oracle's chairman and chief technology officer, Larry Ellison, said OCI would continue to "win large AI training workloads" because it's "faster and less expensive than the other infrastructure clouds." Ellison said it's supporting that AI-driven expansion with its "largest and fastest AI supercomputer in the world," which is powered by 65,000 Nvidia H200 GPUs.
Oracle also continues to expand its cloud-based AI toolkit with dozens of AI models and hundreds of embedded AI agents for cloud applications. The latest AI-oriented version of its cloud database, Oracle 23ai, also enables companies to use their existing customer data to train large language models for generative AI applications.
In other words, Oracle plans to leverage its leadership of the database market to lock more customers into its cloud platform and AI services. It could also attract customers who don't want to tether themselves to a larger cloud platform such as AWS or Azure.
Is Oracle reasonably valued?
From fiscal 2024 to fiscal 2027, analysts expect Oracle's revenue and EPS to grow at a CAGR of 12% and 20%, respectively. That top-line acceleration should be fueled by the expansion of its cloud and AI businesses as its buybacks boost its EPS.
At $155, Oracle's stock trades at 30 times its projected earnings on the basis of generally accepted accounting principles (GAAP) for fiscal 2026. It isn't a screaming bargain, but it still looks reasonably valued relative to its growth potential.
Its forward dividend yield of 1% probably won't impress any income-oriented investors, but it still has plenty of room for future increases since it spent only 46% of its free cash flow (FCF) on its dividends over the past 12 months. Analysts expect its annual FCF to increase from $11.8 billion in fiscal 2024 to $15.4 billion in fiscal 2027 -- and investors should expect it to return a lot of that cash to its investors through dividends and buybacks.
Is it the right time to buy Oracle's stock?
Investors shouldn't expect Oracle's stock to skyrocket anytime soon, but it's still a well-rounded, conservative play on the growth of the cloud and AI markets. Its scale, diversification, and shareholder-friendly practices all make it a great stock to buy today.
