Artificial intelligence (AI) is providing profitable opportunities for businesses and investors. One market where much of the groundwork is being laid for long-term productivity gains from AI is cloud computing. The cloud market was valued at $348 billion, according to Synergy Research, and grew 23% year over year in the first quarter.
Top cloud stocks are worth holding for the long term because of their investments in data centers, where companies store data to use with AI to gather insights, innovate, and build new products. Here are two cloud stocks trading at reasonable valuations that are poised for a bull run.
1. Oracle
Oracle (ORCL 7.84%) stock has tripled over the last three years, but it still offers upside. This leading cloud infrastructure provider just closed the books on fiscal 2025, where it posted better-than-expected revenue. The stock popped following the report and is closing in on a new all-time high.
Oracle has gotten lost in the shadow of the leading hyperscalers like Amazon Web Services (AWS) and Microsoft Azure. But Oracle's cloud revenue growth is about to accelerate significantly, which isn't reflected in the stock's valuation.
In fiscal Q4, ended May 31, Oracle's total revenue grew 11% year over year, driven by a 52% year-over-year increase in cloud infrastructure revenue. Oracle has been capitalizing on AI demand, with more than 100 cloud regions online. In March, management stated that it is becoming the preferred cloud choice for AI training and inferencing due to the superior performance and cost of its Gen 2 cloud architecture.
Its growing data center presence, high-speed data transfer capabilities, and power capacity could give Oracle a major competitive advantage in the cloud infrastructure market. The acceleration in its cloud revenue last quarter suggests it could be entering a potent phase of high growth as AI workloads shift from training to inferencing for more sophisticated AI applications.
Management's outlook calls for its total cloud revenue growth (applications plus infrastructure) to accelerate from 24% in fiscal 2025 to surpass 40% in fiscal 2026. This could pull Oracle's cloud growth well above AWS, which hasn't been able to crack the 20% growth level over the past year.
Despite Oracle's faster rate of cloud growth, the stock trades at a forward price-to-earnings (P/E) multiple of 30 at the time of writing, which is lower than Amazon's forward P/E of 34, as well as Microsoft's 35. Oracle stock appears undervalued and could deliver more upside over the next few years.
Image source: Getty Images.
2. Alphabet (Google)
ChatGPT developer OpenAI recently selected Alphabet's (GOOG -0.70%) (GOOGL -0.59%) Google Cloud for its computing capacity needs, according to a Reuters report. This validates Google's investments in AI and potential to gain share on the cloud leaders. While Alphabet generates most of its revenue and profit from ads, the company's booming cloud business could fuel the stock higher over the next five years.
Google Cloud is currently ranked third in market share behind AWS and Microsoft Azure. But Google has been gaining on the leader, with cloud revenue growing 28% year over year last quarter.
Alphabet credits its cloud momentum to its offering of software for developing AI applications, its Gemini AI model, and the attractive cost performance of its custom AI chips (Tensor Processing Units). Google recently introduced Ironwood, the latest version of its Tensor chip, which is designed for the next stage of AI model development (e.g., inferencing).
Importantly, Google Cloud is now generating more than 7% of the company's operating profit, up from 3.5% this time last year. At this pace of improvement, Google Cloud could contribute around a quarter of Alphabet's operating profit in the next three years or so.
Why is this significant for the stock? The shares currently trade at a modest forward P/E of 18, largely because of Alphabet's dependence on the cyclical advertising market, not to mention increasing competition in search. However, Google's AI investments are an advantage for the company.
Given Google Cloud's momentum, Alphabet is probably the most undervalued cloud stock among the leading hyperscalers, making the stock a compelling buy right now.
