Artificial intelligence (AI) stocks have led the overall market higher over the past couple of years as investors bet on the ability of AI to supercharge companies' growth, and the movement continues. The AI market, set to reach into the trillions of dollars in a few years, still is in its early stages, and today's most-watched players, such as Nvidia and software company Palantir Technologies, won't be the only ones to benefit.
In fact, cloud company Oracle (ORCL 1.42%) could be a surprise winner of the AI revolution, and here's why.
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Oracle's growth since the 1970s
So, first, a little background on Oracle. The company has been around since the late 1970s and has become a leader in database management software. But Oracle didn't stand still and has since expanded into various areas, for example bringing its database to the cloud in 2013, and in more recent times, providing cloud infrastructure for AI customers.
Over time, this has helped Oracle increase both annual revenue and net income into the billions of dollars -- and in recent years, both have taken off amid the AI boom.
ORCL Revenue (Annual) data by YCharts
Customers come to Oracle for cloud capacity, and what sets this player apart is that it provides them with great flexibility. For example, Oracle offers a multicloud service that allows users the opportunity to simultaneously use services from various cloud providers together. Another option, Oracle Alloy, lets customers operate their own clouds for their customers.
On top of this, Oracle also offers a full portfolio of AI-driven cloud applications to help with everything from supply chain management to customer relations.
Now, let's consider the clues that suggest Oracle will be a surprise winner of the AI revolution. First, I'm saying "surprise" winner because Oracle hasn't been as much in the spotlight as the tech giants known as the Magnificent Seven. These players led market gains last year, and most are heavily present in the area of AI.
Oracle's AI business
Meanwhile, Oracle's AI business has been growing in leaps and bounds, pushing it into the league of those AI leaders. I'll use the recent quarter as an example. Oracle's cloud infrastructure revenue soared 52% to $3 billion, and all other segments also generated double-digit growth.
But one of the most encouraging figures of all is the remaining performance obligations (RPO), or the yet-to-be billed revenue coming from signed contracts -- it's important because it offers us visibility on revenue ahead. In the quarter, Oracle said RPO surged 41% to $138 billion.
Finally, another clue that makes me optimistic about the future is a comment made by chairman and chief technology officer Larry Ellison. In the recent earnings call, Ellison said demand for cloud infrastructure "seems almost insatiable." He added: "I mean I don't know how to describe it. I've never seen anything remotely like this." Ellison offered an anecdote, saying a recent customer asked for all of Oracle's available capacity regardless of its location.
What tech leaders are saying
It's important to note that messages from other leading tech companies support Ellison's comments. Leading chip designer Nvidia has spoken of soaring demand for its chips, and AI players such as Meta Platforms and Alphabet have reiterated their multi-billion-dollar AI spending plans for the year. AI software analysis company Palantir also has spoken of unrelenting demand in recent quarters. All of this illustrates the strength of AI demand -- and the AI market growth forecast I mentioned earlier implies the momentum should continue for quite some time.
Now, let's consider Oracle's valuation. Today, the stock trades for 29 times forward earnings estimates, down from a high of more than 30 but above its average level over the past year.
But it's key to remember the following: Revenue has been surging, the current valuation is reasonable for a growth stock, and the points I've talked about above should support further growth. All of this means that Oracle, so far a company that hasn't drawn the most attention in this AI race, could become a surprise winner of the AI revolution as it unfolds.
