Is Oracle Stock a Buy for AI Upside?

The bullish momentum around artificial intelligence (AI) shows no signs of abating. Projected to contribute a massive $15.7 trillion to the global economy by 2030, it would be safe to say that the rally in quality AI stocks is expected to continue. However, most of the enthusiasm around AI so far has been centered around a handful of stocks, with industry leaders like Nvidia NVDA, Microsoft MSFT, Google GOOGL and Amazon AMZN enjoying outsized gains in their share prices due to their early foothold in the megatrend.

That's why growth-minded investors seeking to gain exposure to the sector are now on the hunt for companies that have not been in the AI limelight just yet, but are making strides in the space. One company that fits this description is cloud services provider Oracle ORCL.

About Oracle Stock

Founded in 1977 and based out of Austin, Oracle ORCL is a multinational computer technology corporation specializing in enterprise software, cloud computing systems, and computer hardware. The company's primary offerings are software licensing, cloud services, and hardware sales. ORCL currently commands a market cap of $342.24 billion.

Oracle's share price is up about 18.2% on a YTD basis, beating the broader equities market, and it also offers a dividend yield of 1.3%, backed by 9 years of consistent growth. Notably, with a modest payout ratio of just 28.52%, Oracle has scope to raise its dividends further in the upcoming years.

So, what makes Oracle a worthy AI stock pick? Let's take a closer look.

Oracle's Long History of Stable Earnings

Oracle has been a consistent performer over the years, with revenue and earnings expanding at a CAGR of 5.92% and 6.69%, respectively, over the past five years.

In its most recently reported fiscal Q3, the company recorded growth in both its top line and bottom line. Revenues rose by 7% from the previous year to $13.3 billion, driven by 12% yearly growth in its core cloud services and license support business. That segment's revenues came in at about $10 billion, representing more than 75% of the company's overall revenues in the quarter.

EPS shot up by 16% over the same period to $1.41, outpacing the consensus estimate of $1.38. Notably, Oracle's earnings have come in above expectations in each of the past five quarters.

Aided by AI, the company's remaining performance obligations - a key metric to gauge revenue visibility - went up 29% on a YoY basis to $80 billion. 

Management asserted, "We expect that 43% of our current $80 billion of Remaining Performance Obligations will be recognized as revenue over the next four quarters and that our Gen2 Cloud Infrastructure business will remain in a hypergrowth phase—up 53% in Q3—for the foreseeable future."

Oracle's free cash flow also remained healthy, as the company exited the quarter with a cash balance of $9.5 billion - well above its short-term debt levels of $5.5 billion.

ORCL is valued cheaper than many of its industry peers, in terms of future earnings. The stock is currently trading at a forward price/earnings multiple of 22.29 and forward price/cash flow of 18.13, compared to the sector medians of 24.52 and 23.74, respectively.

How AI Tailwinds Are Boosting ORCL

The most recent gains in ORCL can be attributed to recent reports of the company bagging a $10 billion cloud contract from Elon Musk-led AI startup xAI. Reportedly, Musk wants to rent Oracle's cloud servers for several years. Notably, Oracle also recently formed a pact with data analytics company Palantir PLTR to offer AI solutions to governments and businesses.

While both of these recent developments have been the primary drivers of AI-related upside in Oracle stock lately, there's more to the software giant's AI credentials than this.

For starters, the legendary co-founder of the company, Larry Ellison, stated “The largest AI technology companies and the leading AI startups continue to expand their business with Oracle for one simple reason—Oracle's RDMA interconnected NVIDIA Superclusters train AI models at twice the speed and less than half the cost of other clouds.”

Oracle is innovating in AI by training models directly on customer data, within their own infrastructure. This enhances privacy, security, and accuracy by eliminating the need to transfer sensitive information to the cloud.

Furthermore, Oracle has integrated generative AI features into their Fusion Cloud Applications Suite. This suite offers a comprehensive set of ERP, EPM, SCM, HCM, and Customer Experience tools built on the Oracle Cloud platform. The impact is evident, as Oracle has secured at least 40 new billion-dollar AI contracts that haven't yet been implemented, showcasing the value proposition of this approach.

Additionally, the company in its latest earnings call revealed that it is building 20 data centers in coordination with Microsoft MSFT and Azure. Around $10 billion in capital investments have been earmarked for FY25 to build and expand new data centers.

Analysts Say ORCL Stock Is a Buy

Overall, analysts are optimistic about Oracle stock, which has an average rating of “Moderate Buy,” with a mean target price of $136.39. This indicates an upside potential of about 9.5% from current levels. 

Out of 29 analysts covering the stock, 17 have a “Strong Buy” rating and 12 have a “Hold” rating.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.