Oracle (ORCL -1.56%) has long been a giant in database management, and that's helped the company steadily grow revenue over time. But over the past couple of years, Oracle has seen revenue truly take off thanks to the company's cloud infrastructure business. And what's driving this is demand from customers in the artificial intelligence (AI) space.
In the most recent quarter, cloud infrastructure revenue soared 52% to $3 billion. The company, seeing unrelenting demand, expects growth to be even stronger in the new fiscal year. This message matches what other AI players have been saying in recent times. Nvidia spoke of enormous demand for its new Blackwell architecture and chip, and companies such as Meta Platforms and Alphabet reiterated big capital-spending plans to support their AI platforms. On top of this, analysts predict the general AI market will reach into the trillions of dollars in just a few years.
So, it's not surprising that Oracle is benefiting from this momentum. And this growth story has been so solid in the past months that, during the company's recent earnings call, Chairman and Chief Technology Officer Larry Ellison made a very bold prediction. Does all of this make Oracle a buy now? Let's find out.
Image source: Getty Images.
Oracle's expanding business
First, though, let's take a look at Oracle's story so far. As mentioned, Oracle has been around for years -- 48 to be exact -- and gradually built its leadership in database management. Over time, though, the company expanded into various areas, and its big move was the launch of Oracle Cloud back in 2016.
Customers like Oracle for the strength and security of its database management system and the flexibility of Oracle Cloud. For example, they can choose a multicloud option that allows them to deploy the Oracle database in any cloud, opt for Oracle Alloy to run their own cloud, or adopt a hybrid cloud offering suited to their workload needs.
Today, as AI customers race to develop their platforms, Oracle's cloud applications and infrastructure growth are soaring. The company reported double-digit gains across the board -- from application to infrastructure and even specific platforms like Fusion Cloud ERP -- into the billions of dollars in the recent quarter. And remaining performance obligations (RPO) -- expected revenue from signed contracts -- soared 41% to $138 billion. RPO offers visibility on revenue ahead, so the recently reported numbers are reason to be optimistic.
A good year and an even better one ahead
All of this has prompted Oracle to predict that even though the current fiscal year that just ended was very good, the next one will be even better. The total cloud-growth rate will increase from 24% in the latest fiscal year to more than 40% in the next, according to Oracle's forecasts.
Now, let's move along to the even bolder prediction that Ellison made during the call:
"Oracle will be the largest and most profitable cloud applications company in the world," Ellison said. He also predicts a win in the area of infrastructure, saying "Oracle will build more cloud infrastructure data centers than all of our infrastructure competitors combined."
It's impossible to say whether these predictions will come true, but there is have some evidence that Oracle is on the right track to significantly benefit from AI demand. The company's latest database update known as Oracle 23 AI allows customers to immediately and securely use popular large language models (LLMs) with their own data. Ellison says it's the only system of its kind. This should help companies apply AI to their businesses with ease and drive more growth for Oracle.
As for infrastructure, Ellison says demand is "astronomical," and a recent customer even asked for all available capacity regardless of its location. The AI infrastructure build-out is far from over, so this trend could continue.
Is the stock a buy?
All of this sounds great, but is Oracle a buy right now? After all, the stock is trading at a record high after gains of 29% since the start of the year. It's important to take a look at valuation, and here we can see the stock trades for 31x forward earnings estimates.
This is high compared to Oracle's past valuation, but we should keep in mind two things. First, the AI opportunity has broadened Oracle's revenue opportunities -- as we can see through recent revenue trends -- and this potentially supports the idea of a higher valuation. Second, Oracle's valuation today is in-line with, and even somewhat cheaper than others in the AI space.
ORCL PE Ratio (Forward) data by YCharts.
All of this means Oracle stock likely has room to run in the coming quarters and years. So, now, in the early days of this AI boom, it's a great idea to get in on this AI player that's already delivered a win and is well positioned to continue advancing over time.
