Oracle (ORCL 3.18%) has been in fine form on the stock market in the past three months, registering a gain of 60% as of this writing and far outpacing the S&P 500 index's gains of 10.6%. The good part is that Oracle's terrific rally is likely to continue thanks to a new development that turned Wall Street analysts even more bullish on the stock.
Oracle stock jumped nearly 4% on Monday after revealing that it has struck a new deal for its cloud infrastructure business. The deal is expected to generate more than $30 billion in annual revenue starting in fiscal 2028.
Let's examine the significance of this development and why it has the potential to send this tech stock even higher.
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Oracle's outstanding cloud infrastructure growth seems sustainable
In Oracle's fiscal 2025 (ended May 3), it booked $44 billion in cloud services and license support revenue, an increase of 12%. Booming demand for Oracle's cloud infrastructure, which is being rented by customers to run artificial intelligence (AI) workloads, played a central role in this robust growth.
Revenue from the Oracle Cloud Infrastructure (OCI) segment surged 51% to $10.2 billion, well outpacing the 9% jump in its overall revenue to $57.4 billion. The segment's growth could have been better than what Oracle reported had it not been constrained by its capacity. Oracle says that OCI demand is outstripping supply "dramatically," which is why the company is on track to bring online more data centers across the globe.
Oracle management expects at least 70% growth in OCI revenue in the current fiscal year. And the latest cloud contract Oracle announced suggests that this segment can sustain its terrific momentum, as the value of the deal is way bigger than the company's projected OCI revenue of just over $17 billion for this year. The company estimates that its total revenue will rise by 16% to $67 billion in fiscal 2026.
The additional $30 billion in sales starting in fiscal 2028 will bring the company's top line to $97 billion, assuming that its revenues from other businesses remain constant. That would be enough for Oracle to exceed Wall Street's current top-line expectations for fiscal 2028.
Data by YCharts.
However, don't be surprised if Oracle more decisively blows past those consensus expectations and breaches the $100 billion annual revenue mark in fiscal 2028. The company was already sitting on remaining performance obligations (RPO) worth $138 billion before winning this new contract. RPO refers to the total value of a company's unfulfilled contracts at the end of a period, and it increased by 41% last quarter.
Another thing worth noting here is that Oracle Chairman Larry Ellison remarked last month that the company's RPO figure could be much higher than what it is right now once the $500 billion Stargate Project starts materializing. Oracle is a funder and a key technology partner in the AI infrastructure project, which was announced earlier this year by partners OpenAI, SoftBank, Oracle, and MGX, which intend to deploy $100 billion in capital toward it this year.
Recent developments suggest that Oracle may have already started building Stargate data centers globally, and the scale of this project suggests that there is still a lot of room for growth in its RPO. As such, don't be surprised to see Oracle announcing additional sizable contracts.
Investors may want to buy this AI stock before it is too late
Oracle's remarkable revenue pipeline and the company's efforts to substantially increase its data center footprint should pave the way for stronger top-line growth and set the stock up for more upside. Ellison said in the earnings press release last month that the company is going to build another 47 MultiCloud data centers in the next year, which would be a huge jump from the current count of 23. MultiCloud allows Oracle's customers to deploy its OCI database services on any cloud infrastructure provider's systems.
Meanwhile, Oracle plans to build 30 dedicated data centers for running its own public cloud infrastructure and applications in fiscal 2026, which would double its existing count. As the company brings more data centers online, it should be able to convert more of its backlog into revenue.
This explains why CEO Safra Catz remarked on the previous earnings conference call: "As we bring more capacity online, our revenue and profit growth will further accelerate." So, there is a good chance that Oracle will deliver much faster growth than what's being projected. If the company manages to hit $100 billion in revenue in fiscal 2028 and maintains its sales multiple of 11 at that time, its market cap could hit $1.1 trillion.
That points toward potential gains of 79% in the next three years. What's worth noting is that Oracle isn't all that expensive when compared to the U.S. technology sector's average sales multiple of 8.2, and the slight premium that Oracle is trading at seems justified thanks to the factors discussed above. So, investors looking to buy an AI stock right now may want to buy Oracle hand over fist right away before it flies higher.
