Earlier this year, when investors thought of potential artificial intelligence (AI) winners, names like Nvidia and Palantir Technologies almost always came up -- and these players still are among the stocks AI investors favor. But another tech company has taken a spot on center stage along with them in recent months, and it's actually a company that's been around for nearly 50 years.
I'm talking about Oracle (ORCL -2.92%), a specialist in database management software that's been expanding in the world of cloud computing -- and proving itself to be an AI giant of today and tomorrow. Early last month, the company announced soaring revenue from AI customers flocking to its services and saw its stock price surge more than 35% in one trading session. The stock since has lost some of those gains as investors worried about the company's profitability on revenue from its big AI contracts.
My prediction is these concerns soon may ease, and Oracle stock will even soar after a much-awaited event on Oct. 16.
Image source: Getty Images.
Oracle's growth in AI
First, though, a look at Oracle's progress so far in the explosive AI market. The company in recent years has put a focus on cloud infrastructure, and that's proven to be a wise bet. As AI customers rush to find capacity for their workloads, they've turned to Oracle. This has helped the tech giant report enormous gains in revenue and in remaining performance obligations (RPO), or revenue yet to be recognized from existing contracts.
In the recent quarter, Oracle reported a 55% increase in cloud infrastructure revenue to $3.3 billion, and RPO surged 359% to $455 billion -- the numbers wowed investors, as reflected in the one-day gain in the stock price -- and comments from the company on demand reinforced this bright picture.
Safra Catz, the chief executive officer who recently transitioned to the position of executive vice chair of the board, called the quarter "astonishing." She said the company expects to sign several more multibillion-dollar customers in the next few months, and RPO may surpass half a trillion dollars.
Concerns about profitability on sales
In recent weeks, though, the stock has given back some of its gains -- as mentioned, investors want to know more about margins moving forward and how revenue growth may result in greater profitability. The Information reported that Oracle's major deals for compute were resulting in average gross margin of only 16%, which sparked concern about levels of profitability from these contracts.
We're in the early stages of the AI growth story, so it wouldn't be shocking to see a company start with narrower margin levels and expand them as it scales and its customers scale their AI projects -- and as new revenue opportunities in the space arise. For example, initially customers used GPUs for the training of models, but now inferencing represents a major area of demand -- and the use of Oracle's capacity won't end here.
In recent times, though, analysts generally have shrugged off potential worries about gross margin -- Mizuho reiterated its bullish stance on the stock earlier this month, citing the opportunity for significant growth in the AI market over time.
An update on Oracle's forecasts
And now, at the financial analyst meeting at Oracle's AI World event on Thursday, Oct. 16, the company may further ease investors' concerns. During the latest earnings report, Catz said Oracle would offer an update on long-term financial forecasts during this upcoming meeting.
Considering Oracle's extremely optimistic comments during the earnings report just a few weeks ago, set against the general backdrop of high demand for AI capacity and growth in AI spending, I wouldn't expect a negative surprise this week. In fact, any details might, as I mentioned, remove certain uncertainties from the picture -- and that clearly would be positive for stock performance.
All this leads me to predict that Oracle stock, which has slipped over the past few weeks, may soar after Oct. 16. And even if I'm wrong, the good news is this stock has what it takes, thanks to the company's gains in the AI infrastructure business, to supercharge investors' portfolios over the long term.
