Oracle's AI Ambitions and Stock Performance: Analyzing Recent Developments

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A couple of months ago, media outlets reported that Oracle was rumored to be in negotiations for a $10 billion cloud server contract with Elon Musk's AI start-up, xAI. However, recent stories from Bloomberg and Reuters suggest that talks between xAI and Oracle have subsided. While this is an unfortunate development, I still see many reasons to own Oracle stock as the AI narrative continues to evolve. xAI is one of many start-ups looking to disrupt the AI realm. One of the most important aspects of building quality AI tools is having access to top-tier chips known as graphics processing units (GPUs). GPUs are used in many different generative AI applications and are also quite expensive. At the moment, Nvidia's H100, A100, and new Blackwell GPUs are considered to be the best chips money can buy. It's important to note that xAI has been an existing customer of Oracle's for some time. Under the agreement, xAI is renting a series of Nvidia H100 GPUs to help train its large language model, Grok. But back in May, after raising $6 billion in venture capital funding, xAI looked to deepen its partnership with Oracle as the start-up began shaping its plans to build a data center and its own supercomputer. Although it appears that Oracle will not be further monetizing its relationship with xAI at the moment, the company still has plenty of upside that should not go overlooked. The table below breaks down Oracle's financial profile for its fiscal year 2024, ended May 31. Data source: Oracle investor relations. When looking at the revenue figures above, I would not be surprised if your initial reaction was concern. Although total sales rose 6% year over year, Oracle experienced declining growth in three of its four reportable revenue segments. Moreover, this level of revenue growth pales in comparison with other large enterprise software businesses leading the AI revolution. Nevertheless, I'd encourage investors to take these trends with a grain of salt. The one area of revenue that I am looking at the most is the company's on-premise licensing services. While revenue from this business declined 12% year over year, I actually view this as a net positive. Why? Cloud computing infrastructure is becoming increasingly more utilized across enterprise level businesses. In particular, on-premise services are becoming replaced with off-premise infrastructure. Therefore, I see the deceleration of Oracle's on-premise licensing services as a catalyst for the company's other cloud services. Interestingly, cloud services are the only area of Oracle's business that grew during fiscal 2024. Considering the shift from on-premise to off-premise is likely to play out over the next several years, I think Oracle's cloud services business is set to experience exponential growth. A 6% revenue growth can look uninspiring, but it's important that investors give Oracle's management some credit when it comes to managing the entire business. Operating expenses only rose 2% during fiscal 2024, a theme that I find impressive considering the impacts abnormally high inflation has had on businesses of all sizes. More importantly, profits rose in excess of 20% thanks to the combination of revenue growth and a disciplined approach to managing costs. While the deal with xAI could have been lucrative for Oracle, I think investors honing in on this development alone are being shortsighted. The company still ended fiscal 2024 with $98 billion in backlog, with 39% of that business expected to be recognized as revenue over the next 12 months. Should Oracle start to see some acceleration in its cloud services business thanks to both increased demand for AI and a gradual shift of on-premise solutions being replaced for off-premise cloud infrastructure, I think even higher profits could be in store. Investors with a long-term horizon should consider a position in Oracle. The company represents a compelling opportunity in the AI space outside of the obvious megacap technology players.

Oracle: Undervalued For Its AI Growth Potential (NYSE:ORCL)

Despite these tailwinds, Oracle's ~23x forward P/E ratio still sits well below most of its large-cap software peers. Typical tech companies tend to have one major growth spurt, and then see slowing growth throughout the remainder of their existences as they capture more and more of their addressable market. The AI boom, however, is turning that general rule on its head, as many legacy technology companies are now experiencing a secondary surge from a wave of AI deals. Though not as flashy as some of the other names in the market, Oracle (NYSE:ORCL) has quietly been a big beneficiary of the AI revolution. Year to date, the stock is indeed up ~37%: but as the company looks ahead to its fiscal FY25 (the year ending for Oracle in May 2025), the company is expecting revenue growth to materially accelerate driven by these watershed deals. I last wrote a bullish article on Oracle in April when the stock was trading around $120. Since then, Oracle has rallied a further ~20%, especially after the company announced strong results in June and hinted at accelerating growth in the year ahead. Accordingly, I'm reiterating my buy rating on this stock and have added to my position as Oracle has risen. The key driver behind recent success here, of course, are AI deals. But this isn't just a buzz word for Oracle: the company has indeed signed several landmark deals in its IaaS (infrastructure as a service) business, proving that Oracle's cloud services aren't just a discard laggard behind Amazon AWS (AMZN), Microsoft Azure (MSFT) and Google Cloud Platform (GOOG). In early June, Oracle announced that it signed an agreement with OpenAI (despite OpenAI's close relationship with Microsoft and its existing usage of Microsoft Azure) to provide additional cloud capacity. The company noted that this was one of 30 major AI deals that Oracle signed in the most recent quarter. All of this bodes well for the company's planned growth acceleration in FY25. Beyond the recent tailwinds from AI deals, here is a refresher as to my long-term bull case for Oracle: Oracle has been on an upward tear since June, and not just in sympathy with the broader markets, but because the company posted strong fiscal Q4 (May quarter) results alongside very bullish remarks for the upcoming year ahead. Take a look at the results below: Revenue grew 3% y/y to $14.29 billion, but recall that Oracle is still in the process of unwinding its on-prem license business (which provides more upfront revenue) and shifting more of its customers to cloud-based subscription products (more stable recurring revenue over time). Its cloud metrics were much stronger: The latter, in particular, was driven by 42% y/y growth in IaaS deals: a result of the AI deals that have spurred Oracle's second growth spurt. The 30 AI deals that the company signed in Q1, in management's view, is only the beginning of a long string of new deals that are expected to drive growth acceleration in FY25. In the press release accompanying the company's Q4 results, CEO Safra Catz wrote as follows: "In Q3 and Q4, Oracle signed the largest sales contracts in our history -- driven by enormous demand for training AI large language models in the Oracle Cloud. These record level sales drove RPO up 44% to $98 billion. Throughout fiscal year 2025, I expect continued strong AI demand to push Oracle sales and RPO even higher -- and result in double-digit revenue growth this fiscal year. I also expect that each successive quarter should grow faster than the previous quarter -- as OCI capacity begins to catch up with demand. In Q4 alone, Oracle signed over 30 AI sales contracts totaling more than $12.5 billion -- including one with Open AI to train ChatGPT in the Oracle Cloud." For a company that is now 47 years old, the expected substantial acceleration in revenue growth: from just 3% y/y this quarter to double-digits in FY25, as well as the expectation that every quarter will see sequential acceleration in FY25, is truly rare. And yet despite the expected acceleration and onset of AI dealmaking, Oracle still trades at a quite attractive valuation relative to many of its large-cap software and Internet peers that are also enjoying similar AI tailwinds. Oracle's ~23x P/E ratio sits nearly two turns below its next-nearest peer (Alphabet), while also trading at a ~30% valuation discount to AI leader Microsoft. With this in mind, investors should take comfort in being able to express a long position on AI tailwinds without paying a hefty valuation premium. There's a lot to like about Oracle, including continued strong cloud growth rates, tremendous acceleration potential from AI deals, and a still-modest valuation that trails peers. Stay long here and keep riding the upward wave.