Oracle Cloud Growth Could Cement Wall Street's Next AI Favorite

Bloomberg) — Cloud computing has been one of the first industries to get a demonstrable boost from artificial intelligence. Oracle Corp.'s quarterly results on Monday are likely to extend that trend.

Although Oracle is not the largest cloud provider, AI demand fueled sharp growth in its cloud infrastructure business in recent quarters. Its efforts to expand capacity and etch partnerships with other major tech companies stand to funnel even more business its way.

But because the company is essentially a runner-up among cloud providers — Amazon.com Inc., Microsoft Corp. and Alphabet Inc. are larger and more established — investors have not valued Oracle's stock as richly as its peers. Its fiscal first-quarter report after the market close may help change that, analysts said.

"People aren't yet fully confident that Oracle will be a sustained AI winner, but there's a wave of investors who will become convinced if it puts up another good quarter," said Jordan Klein, a tech-sector specialist at Mizuho Securities. "If it keeps showing cloud strength, that will translate to better overall growth, and from there a higher multiple."

Oracle shares rose as much as 0.9% in early trading on Monday. 

Although Oracle's stock is up about 35% this year — dramatically outperforming other software companies, as well as the overall market — it trades at less than 22 times estimated earnings. That's well below Microsoft, which trades near 30 times, and lower than the Nasdaq 100 Index's multiple of around 24.

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Optimism has been brewing among Wall Street analysts, who see potential in Oracle's underdog status. It may not be the biggest, but that means it has a lot of room to grow.

In June, company executives outlined ways they've been setting up the cloud business for AI expansion, having signed 30 sales contracts worth more than $12.5 billion with companies including OpenAI, whose ChatGPT trains in Oracle's cloud. The company also partnered with Microsoft Corp. and Google to interconnect with their clouds, which can drum up more business from customers that use multiple platforms.

Analysts expect Oracle to deliver overall revenue growth of 6.5% this quarter, but for Oracle Cloud Infrastructure (OCI), they expect that figure to be 46%, according to Bloomberg Consensus estimates. The company itself predicted that each quarter's revenue growth will outpace the prior quarter throughout this fiscal year, with OCI's top line expanding more than 50%.

Guggenheim recently called Oracle its Best Idea, saying it sees signs of "continued momentum" even during what is usually a slow season. Piper Sandler grouped Oracle as one of the "big four" in cloud computing, along with Amazon, Microsoft, and Alphabet. Of the four, Oracle "could sustain the highest growth rate," the firm wrote, adding that OCI has potential to grow by a factor of 10 by 2032.

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This earnings season has been mixed for tech, especially as investors question companies' spending on AI initiatives. However, cloud has been an area where AI has contributed to growth.

Amazon's cloud business was a bright spot of its results, while Alphabet's report showed strong demand for cloud-computing services. Revenue from Microsoft's cloud platform, Azure, rose 29% in its latest quarter. That was a slight deceleration from the previous period, but about 8 percentage points of the increase came from AI.

While many analysts are optimistic about Oracle, it doesn't have the kind of near-unanimous backing that other megacap tech stocks do. Fewer than 60% of the analysts tracked by Bloomberg recommend buying its shares, compared with more than 95% for both Amazon and Microsoft. And the average price target on the stock is just 6% above its current level, suggesting there may be limited room to run. 

Still, bulls see these data points as evidence that Oracle is simply underappreciated.

Oracle "is seeing unbridled demand and it has a pretty long runway for growth," said Ted Mortonson, a technology desk sector strategist at Baird. "It has really flown under the radar compared with others, and there are a lot of investors who don't own a share. Given its strengths, you have to at least be equal weight, but really it should be a core holding."

Tech Chart of the Day

The Nasdaq 100 Index fell 5.9% last week, its biggest one-week drop since November 2022. The index fell 2.7% on Friday in the wake of a disappointing report on the US labor market, which added to broader concerns about the state of the tech trade. Nvidia Corp. was particularly weak, slumping 14% over the week, its biggest drop since September 2022.