Oracle Corp (NYSE:ORCL) faced a sharp decline in its stock price, falling as much as 13% on Tuesday, following lower-than-expected revenue for the first quarter of fiscal year 2024 and a below-estimate forecast for the second quarter. The company's earnings report, released on Monday, fell short of Wall Street's expectations, signaling that the anticipated boost from generative Artificial Intelligence (AI) might take longer to materialize than initially expected.
The company is known for its database software and has been trying to catch up with major cloud providers such as Amazon (NASDAQ:AMZN) Web Services, Microsoft’s Azure and Alphabet’s (NASDAQ:GOOGL) Google Cloud. However, Oracle's cloud sales growth slowed down in Q1, with the company's cloud infrastructure revenue coming in at $1.5 billion, marking a 66% increase but still lower than the previous quarter's 76% growth.
Oracle's CEO Safra Catz also warned of near-term weakness in revenue growth at the Cerner (NASDAQ:CERN) health records business, which Oracle acquired for $28.3 billion last year. The company is transitioning customers in this unit to the cloud from license purchases that are recognized upfront.
Despite these challenges, Oracle continues to see growth in its infrastructure-as-a-service business, which grew by 66% year-over-year. Oracle's chief technology officer, executive chairman, and co-founder Larry Ellison noted during the company's earnings call that AI development companies have signed contracts to purchase more than $4 billion of AI training capacity in Oracle's Generation2 Cloud.
However, D.A. Davidson analyst Gil Luria expressed concerns about Oracle's growth prospects stating, “We continue to believe high single-digit growth might be unsustainable for Oracle given Cerner integration risks and formidable data center competition,” as he cut his price target on the stock to $105.
Despite these concerns, most analysts remain positive about Oracle. At least 14 brokerages raised their price targets on the stock, pushing the median view to $133, nearly 5% higher than the company’s last closing price. Barclays (LON:BARC) analysts attributed the share price decline to Oracle’s rally in the run-up to earnings and highlighted strong deferred revenue, AI backlog commentary and some positive signs in the cloud business as positives.
Oracle currently has a 12-month forward price-to-earnings ratio of 21.78, compared with the industry median of 15.42. The company's stock has risen 55% this year on optimism that the rise of generative AI would drive up cloud demand.
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