Oracle's AI-Driven Ascent: Potential Path to $1 Trillion Valuation by 2031

Meet the Unstoppable AI Stock Poised to Join Nvidia, Taiwan Semiconductor, and Broadcom in the $1 Trillion Club by 2031 | The Motley Fool

Decades of cloud systems and information technology (IT) expertise could propel this artificial intelligence (AI) specialist to new heights. There's no denying the impact of artificial intelligence (AI) on the tech landscape over the past couple of years, but the extent of the transformation remains to be seen. A quick review of the world's most valuable companies by market cap provides compelling evidence: Nine of the top 10 -- all members of the $1 trillion club -- have undeniable ties to AI. Several key players in the semiconductor and information technology (IT) spaces have taken up residence on the list. Nvidia provides 98% of the graphics processing units (GPUs) that underpin generative AI in data centers, Taiwan Semiconductor Manufacturing's foundry produces roughly 90% of the world's most advanced AI chips, and Broadcom is a critical part of tech infrastructure, with 99% of all internet traffic passing through its equipment. With a market cap of just $457 billion, it might seem premature to presume Oracle (ORCL 0.69%) will earn its membership in this elite fraternity. However, the company's recent business performance and management's long-term outlook provide compelling evidence that the accelerating demand for AI will fuel additional growth for years to come. Roughly 98% of Global Fortune 500 companies are Oracle customers, according to the company, using some combination of its cloud, database, and enterprise software offerings. This gives Oracle a vast target market to peddle its AI and cloud solutions. This has helped drive the company's growth higher. During Oracle's fiscal 2025 second quarter (ended Nov. 30), revenue grew 9% year over year to $14.1 billion, while its operating income grew by 17%. Investors were concerned about its operating income margin, which fell from 21% in Q1. However, much of the decline was attributed to foreign currency headwinds resulting from a dramatic strengthening of the U.S. dollar -- not due to operational issues. Most businesses are looking for a trusted source to guide their AI adoption, helping boost Oracle's fortunes. CEO Safra Catz called out "the growing trend of customers and longer contracts, as they see firsthand how Oracle Cloud services are benefiting their businesses." She also noted that record demand for AI drove its cloud revenue up 52% year over year, far outpacing the growth of its larger cloud rivals. This trend is, in turn, fueling the company's remaining performance obligation (RPO) -- or contractual obligations not yet included in revenue -- which surged 50% year over year in constant currency to $97.3 billion. The fact that RPO is growing faster than revenue provides insight into future growth, which, in this case, is robust. In the third quarter, Oracle expects its revenue growth rate to accelerate to 10% at the midpoint of its guidance, fueled by cloud revenue growth of 26%. This will drive adjusted earnings per share (EPS) growth of about 8%. Oracle has a long, notable history of helping customers choose the most suitable IT, cloud, and AI solutions. That puts the company in the catbird seat to help it join the generative AI revolution. Given the magnitude of the opportunity, this transition will take years, if not decades. According to Wall Street, Oracle is expected to generate revenue of $57.7 billion during its fiscal 2025 (which began June 1), giving it a forward price-to-sales (P/S) ratio of roughly 8. Assuming this P/S remains constant, Oracle would need to grow its revenue to approximately $126 billion annually to support a $1 trillion market cap. Analysts are forecasting revenue growth of about 9% for the current fiscal year and 13% thereafter. If the company achieves these targets, Oracle could achieve a $1 trillion market cap by 2032. However, management recently boosted its long-term outlook and is forecasting revenue of at least $104 billion by fiscal 2029, or a compound annual growth rate (CAGR) of greater than 16%. If Oracle achieves its internal guidance, it will likely reach a market cap of $1 trillion by 2031 -- or sooner. Estimates regarding the market value of generative AI continue to soar. The market could be worth between as much as $15.7 trillion annually by 2030, according to Big Four accounting firm PwC. If Oracle can capture just a fraction of that opportunity and continues serving up compelling AI solutions to its customer base, its growth spurt will continue for the rest of this decade, helping the company join the company of trillionaires in short order.

Prediction: This Powerhouse AI Stock Will Join Nvidia, Broadcom, Tesla, and Others in the $1 Trillion Club Within 4 Years | The Motley Fool

The U.S. economy has a remarkable track record of producing the world's most valuable companies: Apple is still the world's largest company, with a market capitalization of $3.7 trillion. But since 2018, seven other American technology companies have joined it in the trillion-dollar club: Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, Tesla, and Broadcom. I think one more company is set to earn its membership in this club within the next four years. Some of the biggest artificial intelligence (AI) developers in the world are lining up to rent Oracle's (ORCL 0.69%) industry-leading data center infrastructure, and this part of its business could grow more than tenfold, according to management's guidance. Oracle's market cap is $463 billion as of this writing, so if it does join the $1 trillion club in four years, as I predict, investors who buy its stock today could earn a very nice return of 116%. Nvidia CEO Jensen Huang predicts data center operators like Oracle, Microsoft, and Amazon will spend $1 trillion over the next four years on upgrading their infrastructure to meet demand from AI developers. That involves filling them with thousands of graphics processors (GPUs), which are specialized chips designed to ingest and process mountains of data for AI workloads. Nvidia supplies the most powerful GPUs in the industry. And Oracle's Cloud Infrastructure (OCI) supercluster technology enables developers to scale up to 65,000 of Nvidia's H200 GPUs, which is the highest number in the industry. To put it simply, access to more chips can enable developers to build and deploy larger models, which translates into "smarter" AI software. OCI's random direct memory access (RDMA) technology also allows data to flow from one point to another much faster than traditional Ethernet networks. And since most developers rent computing capacity by the minute, faster processing can equal major cost savings. During its recent fiscal 2025 second quarter (ended Oct. 31), Oracle said GPU use climbed by 336% compared to the same period in fiscal 2024, which speaks to how quickly demand is ramping up. So far, OCI's infrastructure has attracted top AI start-ups like Cohere, OpenAI, and Elon Musk's xAI. Oracle currently operates 98 data center regions and plans to grow that footprint by more than tenfold to somewhere between 1,000 and 2,000 locations over time. The company's OCI will soon offer new clusters featuring over 131,000 of Nvidia's latest Blackwell GPUs, which will pave the way for the most advanced AI applications yet, and potentially drive a new wave of demand. Oracle generated $14.1 billion in total revenue during the second quarter, but the OCI segment was responsible for just $2.4 billion of that total, so it isn't a massive contributor yet. It's still smaller than Oracle's software-as-a-service (SaaS) business, which generated $3.5 billion in revenue during the quarter. It offers ready-made cloud applications to help businesses across dozens of industries manage everything from their inventory to their payroll. However, OCI is consistently the star performer when it comes to growth. While SaaS revenue grew by 10% year over year during the second quarter, OCI revenue soared by 52%. It was the fastest growth in a year, and it marked the second consecutive quarter of acceleration. OCI revenue would have grown even faster if Oracle had more data center capacity available, but it's still struggling to meet demand even though it's building infrastructure as quickly as possible. That demand can be seen in Oracle's remaining performance obligations (RPOs), which soared by 50% during the second quarter to $97 billion. RPOs typically convert into revenue at a future date once the company can deliver the agreed-upon services -- i.e., OCI revenue could surge once it can bring more data centers on line based on the deals it has already locked in. Oracle CEO Safra Catz predicts RPOs will grow even higher from here because of the sheer volume of deals the company is signing, including a major one with Meta Platforms recently. Meta developed the world's most popular open-source large language models (LLMs) called Llama, which have been downloaded over 600 million times, and the company will shift some of its training workloads over to Oracle's infrastructure. Oracle stock trades at a price-to-earnings ratio (P/E) of 40.5, which is a slight premium to the average P/E of Microsoft, Amazon, and Alphabet (36.7). They are three of the biggest operators of AI data center infrastructure besides Oracle: But Oracle stock looks much more attractive when we measure its value based on its potential earnings. For example, Wall Street's consensus estimate (provided by Yahoo!) suggests the company's earnings per share (EPS) will grow by 14.4% to $7.05 during its fiscal year 2026 (which starts in June of this calendar year). That places its stock at a forward P/E of just 23.5. Mathematically speaking, Oracle stock would have to soar by 72.3% over the next 18 months just to maintain its current P/E of 40.5, which would value the company at almost $800 billion. If it grows its EPS by 14.4% again in fiscal 2027 and fiscal 2028 while maintaining the same P/E, it will be a $1.04 trillion company. Even if its P/E settles at 36.7, its valuation would still be around $950 billion. But Oracle's earnings actually grew by 22% in the first half of fiscal 2025, and I think that pace is likely to persist (and maybe even accelerate), suggesting Wall Street might be too conservative. Remember: The company plans to grow its data center footprint more than tenfold. And its infrastructure is unique because it's fully automated, meaning it should become significantly more profitable at scale. In fact, during the last couple of quarterly conference calls with investors, Catz talked about how the gross profit margin of the infrastructure business is climbing as more data centers come on line. If Oracle grows its earnings by 22% annually instead of 14% through fiscal 2028, it will be a shoo-in to join the $1 trillion club even if its P/E drops to around 34.