Oracle's Cloud Strategy Fuels Growth Amid AI Boom, but Challenges Persist

Is Oracle Stock a Buy Now? | The Motley Fool

The tech giant's cloud strategy is successfully capturing AI demand. Shares of veteran tech company Oracle (ORCL -0.63%) enjoyed a spectacular year. The stock was at a 52-week low of $99.26 last December before beginning an upward ascent in 2024. Just weeks ago, shares hit an all-time high of $178.61. Oracle originally rose to prominence for its database software. Today, the company is focused on cloud computing, and that has supercharged its stock. Why? Because the cloud is the ideal home for artificial intelligence (AI), given AI's need for massive data and computing power. With the rise of AI combined with Oracle winning the business of ChatGPT creator OpenAI this year, the venerable tech titan's stock justifiably deserves investor interest. Does this mean now is the time to buy Oracle shares? Here's a look into the company to answer that question. Oracle's cloud-computing business is among the top 10 in the world and notched an impressive series of customer wins. Along with the OpenAI deal, Oracle's cloud infrastructure was chosen by the U.S. Army to modernize its personnel systems. The U.K. government also selected Oracle's cloud this year. These customer gains enabled Oracle's cloud sales to increase 21% year over year to $5.6 billion in its 2025 fiscal first quarter, ended August 31. This result extended the company's fiscal Q4 performance when cloud revenue grew 20% year over year to $5.3 billion. Overall Q1 revenue reached $13.3 billion, up from the prior-year's $12.5 billion. With this strong start to fiscal 2025, Oracle anticipates full-year revenue to rise by double digits and cloud-infrastructure sales growth to accelerate over fiscal 2024. As a tailwind to Oracle's revenue growth, industry forecasts expect the cloud-computing market to expand from nearly $600 billion last year to over $2 trillion by 2032. Perhaps nothing tops the potential in Oracle's future more than AI. Cloud-computing data centers are essential components of AI infrastructure. So Oracle is pouring resources into expanding its cloud footprint. According to co-founder and CTO Larry Ellison, the company possesses over 160 cloud-data centers around the globe and intends to build more. This month, the conglomerate announced plans to spend $6.5 billion constructing a data center in Malaysia. Ellison declared Oracle would eventually possess over 1,000 data centers. To create sophisticated AI that can perform tasks such as identifying cancer, Oracle is constructing large, complex data centers. One of them will be so large, it will require three small modular nuclear reactors to power it. Oracle is able to make these kinds of investments thanks to excellent operating cash flow. By the end of Q1, the company had generated $19.1 billion in cash flow from operating activities over the trailing 12 months, easily covering its capital expenditures (capex) of $7.9 billion over the same period. This is important since, as the company expands its data-center footprint, management anticipates fiscal 2025 capex to double over 2024. That brings us to another Oracle strength: its free cash flow (FCF). The company generated first quarter FCF of $5.1 billion and $11.3 billion over the trailing 12 months. This, too, is important for investors to know since FCF is used to fund Oracle's dividend, currently yielding 0.9%. The company's FCF handily covered Q1's dividend payments of $1.1 billion, which means its dividend is secure. Given Oracle's traction in the cloud and AI markets, and its strategy to continue strengthening its position through data-center expansion, the company makes for a worthwhile long-term investment. The question is whether now is the time to invest, given shares recently reached a record high. A look at Oracle's price-to-earnings (P/E) ratio, used to assess stock valuation, tells you how much investors are willing to pay for a dollar's worth of earnings. Oracle's elevated P/E multiple compared to other veteran tech-cloud giants, Microsoft and IBM, suggests its stock is expensive. Taking a look at what Wall Street thinks, the consensus among Wall Street analysts is an overweight rating with a median share-price target of $190 for Oracle stock. So there's a belief in more upside despite Oracle's record-high share price. Although the stock pulled back a bit from its high, its elevated P/E ratio indicates now isn't the best time to buy. Wait for Oracle's share price to dip further before considering an investment.

Oracle's SWOT analysis: cloud growth powers stock despite saas headwinds By Investing.com

Oracle Corporation (NYSE:ORCL) has positioned itself as a major player in the rapidly evolving cloud and artificial intelligence (AI) landscape, but questions remain about the sustainability of its growth trajectory. The enterprise software giant has seen its stock price climb over the past year on the back of strong cloud infrastructure growth and high-profile AI partnerships, even as its legacy software-as-a-service (SaaS) business faces headwinds. Oracle's recent financial results paint a picture of a company in transition. In its fiscal fourth quarter of 2024, the company reported total revenue of $14.3 billion, representing 4% year-over-year growth on a constant currency basis. While this fell short of analyst expectations, Oracle's Cloud Infrastructure (OCI) segment continued to show robust growth, expanding by 42% compared to the previous year. The company's profitability metrics remained strong, with adjusted operating margin coming in at 47% for the quarter. Free cash flow for the fiscal year reached $11.8 billion, translating to an impressive 75% free cash flow margin. These figures underscore Oracle's ability to maintain financial discipline even as it invests heavily in growth initiatives. Looking ahead, Oracle's management has provided an optimistic outlook for fiscal year 2025. The company expects to achieve double-digit revenue growth, with sequential acceleration throughout the year. This guidance has buoyed investor sentiment, despite the recent revenue miss. At the heart of Oracle's growth strategy is its push into cloud infrastructure and AI services. The company has made significant strides in positioning OCI as a viable alternative to larger cloud providers, particularly for AI workloads. This effort received a major boost with the announcement that OpenAI, a leader in generative AI technology, would be using Oracle's infrastructure. The OpenAI partnership serves as a powerful endorsement of Oracle's cloud capabilities and is expected to attract other AI-focused customers. Additionally, Oracle has forged a strategic alliance with Google (NASDAQ:GOOGL) Cloud, which analysts view as a positive move for future-proofing its database business and potentially accelerating growth. Oracle's commitment to expanding its cloud infrastructure is evident in its capital expenditure plans. The company expects to double its capex in fiscal year 2025 compared to 2024, focusing on additional data center capacity to meet growing demand for OCI services. Despite the positive momentum in its cloud business, Oracle faces several challenges. The company's SaaS revenue growth has decelerated, reflecting broader industry trends and intensifying competition. While not entirely unexpected, this slowdown could weigh on overall growth if it persists. Another area of concern is the conversion of Oracle's substantial backlog into recognized revenue. The company reported a 44% year-over-year increase in Remaining Performance Obligations (RPO) to $98 billion, driven largely by AI-related contracts. However, some analysts have questioned the pace at which this backlog will translate into actual revenue. Oracle also operates in a highly competitive market, facing off against established cloud giants and nimble startups alike. The company's ability to maintain its growth trajectory while competing for talent and market share remains a key risk factor. While Oracle has seen impressive growth in its OCI segment, there are concerns about the sustainability of these high growth rates. As the business scales and competition intensifies, maintaining the current pace of expansion may become increasingly challenging. Additionally, the cyclical nature of infrastructure investments and potential macroeconomic headwinds could impact demand for cloud services. Oracle's legacy SaaS business has shown signs of slowing, which could become a more significant issue if the trend continues. As a substantial portion of Oracle's revenue still comes from its SaaS offerings, ongoing deceleration in this segment could offset gains made in cloud infrastructure. The company will need to demonstrate its ability to reinvigorate its SaaS portfolio or successfully transition customers to its cloud platforms to mitigate this risk. Oracle's partnerships with AI leaders like OpenAI and its focus on providing infrastructure for AI workloads position the company to capitalize on the rapidly growing AI market. As demand for AI computing resources continues to surge, Oracle could see accelerated adoption of its cloud services. The company's ability to attract and retain AI-focused customers could drive significant revenue growth and market share gains in the coming years. Despite significant investments in cloud infrastructure, Oracle has maintained strong profitability metrics. The company's ability to leverage its existing customer base and cross-sell cloud services could drive further margin expansion. As Oracle scales its cloud operations, it may benefit from increased operational efficiencies and economies of scale, potentially leading to improved profitability even as it continues to invest in growth initiatives. Oracle Corporation finds itself at a critical juncture, balancing the promise of its growing cloud and AI initiatives against the challenges in its traditional software business. While analysts remain generally optimistic about the company's prospects, as evidenced by recent price target increases, the path forward will require careful execution and continued innovation. As Oracle navigates this transition, investors will be closely watching its ability to deliver on its ambitious growth targets and solidify its position in the competitive cloud computing landscape. This analysis is based on information available up to October 28, 2024. Gain an edge in your investment decisions with InvestingPro's in-depth analysis and exclusive insights on ORCL. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore ORCL's full potential at InvestingPro. Should you invest in ORCL right now? Consider this first: Investing.com's ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if ORCL is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level. To evaluate ORCL further, use InvestingPro's Fair Value tool for a comprehensive valuation based on various factors. You can also see if ORCL appears on our undervalued or overvalued stock lists. These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.