Back in 2020, Oracle (NYSE:ORCL) was widely seen as a fading player in the cloud infrastructure spacea mature legacy vendor at risk of losing market share. Fast forward four years, and the narrative has shifted dramatically. Oracle is now experiencing significant growth in cloud infrastructure, shedding its outdated image as a company reliant solely on its database legacy. Over the past three years, its stock has surged ~50%, outpacing many faster-growing cloud competitors. This turnaround is driven by an aggressive pivot to cloud services, evolving from a measured transition to an all-out sprint. Oracle's transformation bears striking similarities to Amazon (NASDAQ:AMZN)'s rise, with cloud services fueling growth while traditional business lines take a back seat. Oracle Cloud, encompassing both SaaS (cloud-based versions of its software) and IaaS (infrastructure competing with AWS and Azure), has emerged as the company's primary growth engineand I believe the cornerstone of its evolution into an AI powerhouse.
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Recently, Oracle made headlines with its $500 billion joint investment in The Stargate Project, an OpenAI-led initiative to develop a massive data center footprint for AI compute needs. However, the AI growth story faced a major test on January 27, 2025, when DeepSeek announced that its latest AI models deliver performance comparable to OpenAI's ChatGPT. This triggered a broad market sell-off, with Oracle dropping 13.79% as investors questioned the long-term returns of massive compute investments. Despite the short-term turbulence, I believe Oracle's long-term growth story remains intact.
AI-Powered Growth in OCI: The rise of AI has created a need for powerful cloud computing resources, and Oracle has taken advantage of this opportunity. The amount of GPU usage on OCI increased by 336% in just one quarter, showing how much AI developers rely on Oracle's infrastructure. OCI stands out because of its ultra-fast networking and automated data centers, which allow AI models to train more quickly and at lower costs compared to many competitors.Oracle recently announced it had built the "largest and fastest AI supercomputer," featuring up to 65,000 Nvidia (NASDAQ:NVDA) G200 GPUs. Partnerships with AI leaders like Meta (NASDAQ:META), OpenAI, and Nvidia show that OCI is becoming a trusted option for handling large-scale AI tasks. These collaborations give Oracle an edge over cloud providers that lack specialized AI capabilities. The big question is whether Oracle can continue growing in this space. AI workloads require massive amounts of computing power and energy, so Oracle must scale efficiently to maintain its advantage. Right now, demand for AI cloud services is growing rapidly, but Oracle will need to keep investing in its data centers and technology to stay ahead. I believe that the Stargate project investing $500 billion is commitment enough that Oracle is able to continue investing and continue growing.
Cloud Database Strategy: While Oracle's advancements in AI have garnered significant attention, its database heritage remains a critical driver of its growth. Enterprises continue migrating on-premises databases to the cloud, drawn by Oracle's high-performance infrastructure and its flexible multi-cloud approach. This shift is yielding strong resultsOracle's cloud database services grew 28% YoY, generating $2 billion in annualized revenue. Oracle has also aggressively expanded its cloud footprint, adding 17 joint cloud regions to run its services on partner clouds, with plans for 35 more. This aligns with the rising trend of multi-cloud adoption, strengthening Oracle's positioning in this rapidly growing market. Furthermore, Oracle's data center expansion strategy sets it apart from competitors. The Stargate project, in particular, is a key differentiator, benefiting from strong U.S. government support as the country seeks to maintain technological dominance over China. This backing could accelerate Oracle's data center expansion plans, pulling forward investments and driving faster growth. Additionally, Oracle's deepening ties with OpenAI and Microsoft (NASDAQ:MSFT) will likely prove invaluable in the broader AI race, as it aligns with two of the most influential players in the space. Given these factors, I expect sustained top-line growth from Oracle's cloud database segment, with long-term benefits and synergies emerging as the Stargate project progresses.
Sustained Growth Through Cloud Investments: Oracle has moved beyond simply catching up to early cloud leaders like AWS and Azure. The company is charting a unique path, leveraging AI, multi-cloud partnerships, and its SaaS offerings to drive growth. Management's commitment to operational discipline has allowed Oracle to improve profitability while increasing investments in high-growth areas like AI and cloud infrastructure. Looking ahead, Oracle aims to exceed $25 billion in cloud revenue this fiscal year, supported by its robust pipeline of AI deals and continued success in SaaS. As more organizations recognize OCI as a competitive and scalable alternative for large-scale AI, I believe Oracle's growth trajectory will only strengthen.
Gaining Ground in a Competitive Landscape: Oracle may not yet rival the dominant players in PaaS, IaaS, or SaaS, with its market share trailing industry leaders like Amazon (AWS) and Microsoft (Azure). However, recent quarters have shown Oracle's cloud revenue growing at a faster pace than its competitors. In 2024, Oracle climbed from 7th to 5th position in global cloud market share, overtaking IBM (NYSE:IBM) and Salesforce, according to Synergy Research. Although I don't expect Oracle to challenge AWS or Azure in the short term, I believe the company is well-positioned to capture additional market share. Even incremental gains would significantly enhance Oracle's financial performance.
[Synergy Research]
FundamentalsOracle recently reported its fiscal Q2 results for the November quarter, which caused a brief sell-off due to a slight miss against consensus estimates. Non-GAAP EPS came in at $1.47, up 10% YoY, and beat management's high-end constant currency guidance by $0.01, but missed analyst expectations by the same margin. Revenue grew 8.6% YoY to $14.06 billion, just below Wall Street's estimate of $14.12 billion, marking a 50bps shortfall.
Despite these misses, the core elements of Oracle's business continue to demonstrate strong growth. Oracle's cloud segment, encompassing IaaS and SaaS, reported a 24% YoY increase to $5.9 billion, accounting for 42% of total revenue. IaaS alone saw exceptional growth of 52% YoY, contributing $2.4 billion to the company's cloud revenue. The SaaS division, which grew 10% YoY, has also been a consistent performer. Together, these segments underline Oracle's robust cloud strategy and provide evidence that the Q2 miss is likely an anomaly rather than a trend.
Oracle's revenue growth has been accelerating over recent quarters, rising from 4% YoY in Q3 FY24 to 8% in Q1 FY25 and 9% in Q2 FY25. This steady improvement highlights the growing strength of the business. Moreover, Oracle has managed to maintain impressive margins despite its aggressive expansion efforts. Non-GAAP operating margin reached 45%, with pro forma operating income increasing 10% YoY to $6.10 billion. Margins also improved by 60bps YoY to 43.4%. With its combination of ~10% revenue growth and 40%+ margins, Oracle comfortably meets the "Rule of 40," a benchmark of high-performing growth companies.
For Q3 FY25, Oracle expects currency headwinds to impact both revenue and earnings due to a stronger dollar. Revenue is forecast to grow between 9% and 11% in constant currency (7% to 9% in USD), while non-GAAP EPS is projected between $1.50 and $1.54 in constant currency ($1.47 to $1.51 in USD). Despite these challenges, management maintained the quarterly dividend at $0.40 per share, signaling confidence in the company's financial health.
Oracle's growing demand story is reflected in its capital expenditure trends. Management guided for a doubling of CapEx in FY25 compared to the prior year, driven by strong customer demand for OCI and related services. During the last quarter, the capex-to-sales ratio reached an all-time high of nearly 30%, signaling a proactive approach to expanding capacity.
While some may view the increase in CapEx as a concern, I see it as a necessary move to capitalize on the company's growing backlog. Remaining performance obligations (RPO) surged 50% YoY, with current RPO rising 20% YoY, demonstrating sustained revenue visibility. Oracle's ability to convert its robust backlog into revenue further reinforces its growth trajectory. Notably, Oracle's operational cash flow of $20 billion over the trailing twelve months positions it well to fund future growth initiatives and return value to shareholders.
Oracle's growth strategy now rests on three strong pillars: IaaS, SaaS, and cloud database services. The recent Meta deal brought another major AI player into Oracle's ecosystem, while partnerships with hyperscalers like AWS, Google (NASDAQ:GOOGL), and Microsoft have added a new dimension to its cloud database offerings. These developments ensure that Oracle is not just reliant on one segment for growth but is leveraging multiple engines to drive revenue and profitability. As long as demand for cloud and AI services remains strongand I see no signs of it slowing down.
Valuation DynamicsNew Growth Dynamics Demand a Higher Multiple: Despite Oracle's accelerating growth and strategic AI partnerships, the stock continues to trade at a compelling valuation compared to its large-cap software peers. Oracle's forward P/E multiple of 19.4x is the lowest among competitors benefiting from similar AI-driven tailwinds, including Microsoft (23.7x), Amazon (29.2x), Workday (NASDAQ:WDAY) (24.1x), and Salesforce (25.3x). This relative undervaluation provides investors with an opportunity to gain exposure to Oracle's AI and cloud-driven growth at a discount. While Oracle has not seen the same level of stock price appreciation as some AI-focused peers, I view this as a favorable entry point for investors to build a position.
[Alpha Spread]
Oracle has historically traded at a discount to its peers due to slower growth rates. However, this gap has significantly narrowed. With cloud revenue growing at 24% YoY, Oracle is now on par with, or even surpassing, the growth rates of companies like Salesforce and Workday, whose revenue growth has slowed to the low/mid-teens. The company's AI-driven tailwinds and strategic partnerships, such as the recent Meta deal and its collaborations with hyperscalers, are transforming Oracle's growth narrative. These developments justify a re-rating of Oracle's valuation. I believe Oracle should trade at the peer average forward P/E of 24.3x, reflecting its improved growth trajectory and strong position in the AI and cloud markets. Based on this multiple, I derive a target price of ~$201.7 per share, representing approximately 25% upside from current levels.
Discounted Cash Flow Analysis Supports Upside: To further assess Oracle's valuation, I conducted a DCF analysis using a discount rate of 9% and a terminal growth rate of 3% beyond the five-year forecast. I assumed a top-line CAGR of 12% over the next five years, aligned with Wall Street expectations, and kept the net margin steadya conservative approach given Oracle's proven ability to scale profitably. Under these assumptions, I arrive at a DCF-based target price of $188.54 per share, indicating upside potential of roughly 15%. While this is slightly below the target derived from peer multiple analysis, it still underscores the stock's attractive risk-reward profile.
[Alpha Spread]
Oracle's investments in AI, particularly in IaaS and OCI, have positioned the company as a key player in the next phase of cloud computing. The early-stage infrastructure investmentsdata centers, chips, and tools for building large language modelsare now paying off. With demand for Oracle's AI-powered solutions driving top-line growth, I expect further convergence between Oracle's valuation and those of its peers. The biggest risk for Oracle lies in the broader market environment. With valuations in the tech sector elevated, a market-wide correction could pressure Oracle's stock. However, Oracle's lower valuation relative to its peers provides some downside protection, making it a safer bet in a volatile market.
Concluding ThoughtsOracle stands out as a resilient long-term investment in the cloud and AI sectors. Despite the Q2 miss, the company's accelerating revenue growth, robust margins, and strong demand for OCI reflect its ability to thrive in competitive markets. The recent Meta deal and expanding partnerships with major AI players underscore Oracle's growth trajectory, even as it lags behind larger competitors like Amazon and Microsoft in market share. With its disciplined expansion strategy, stable financials, and attractive valuation, Oracle offers a compelling entry point at ~15% off recent highs. For investors with a long-term horizon, Oracle's growth story remains firmly intact. The combination of strong fundamentals, increasing AI-driven opportunities, and reasonable valuation multiples provides both stability and upside potential. Whether through its cloud dominance, AI capabilities, or shareholder returns via dividends, Oracle is well-positioned to deliver sustainable value over time.
This content was originally published on Gurufocus.com
