Oracle Has Spoken: The AI Cloud Is Bigger And Growing Faster

Key Points

• Oracle has a blow-out quarter and sends the market higher. 
• Analysts cheered the news due to a surge in AI-based demand. 
• Oracle's dividend and share repurchase program is healthier than ever, and the stock could gain another double-digit. 

In the words of Oracle NASDAQ: ORCL CEO Safra Catz, “Both of our two strategic cloud businesses are getting bigger—and growing faster. That bodes well for another strong year in FY24." That bodes well for all of tech because the AI revolution supports this growth. If you ever wonder where AI lives, it’s in the cloud because that is the only place to handle the data loads used to train the models and where the new data is being created. The point is that Oracle issued a game-changing report akin to NVIDIA’s NASDAQ: NVDA, and the stock is moving higher. What this means for investors is that tech stocks can continue to rally and may lift the S&P 500 over the summer. 

Oracle Lifts Tech Stocks With Q4 Results, Outlook 

Oracle had a solid quarter supported by the surge in AI demand. The company reported $13.84 billion in net revenue, a gain of 17% compared to last year. The revenue beat the Marketbeat.com consensus estimate by 80 basis points and came with a better margin than expected. The results are mixed on a segment basis, with Cloud Services and License Support up 23% YOY and Cloud License and Off-Premise License down 15%. 

The mitigating factors are that legacy businesses are responsible for the weakness, and the growth drivers outperform at all levels. Within the Cloud Services and License Support segment, the cloud grew by 54%, led by IaaS. IaaS revenue grew by 76%, SaaS revenue by 44%, and Fusion ERP and NetSuite by 26% and 22%. 

"Oracle's Gen2 Cloud has quickly become the number 1 choice for running Generative AI workloads," said Oracle Chairman and CTO, Larry Ellison. "Why? Because Oracle has the highest performance, lowest cost GPU cluster technology in the world. NVIDIA themselves are using our clusters, including one with more than 4,000 GPUs, for their AI infrastructure.”

Margins expanded more than expected. The company’s gross and operating margins expanded, leaving adjusted EPS at $1.67. This is up 27% compared to the top-line 17% and 560 basis points better than expected. The company doesn’t give guidance but shows clear momentum. Mr. Ellison also says more than 35 AI development firms have signed contracts for billions in next-gen cloud capacity, a solid indicator of future business. 

Analysts Push Oracle Into “Ballistic” Mode 

The analysts have been bullish on Oracle’s cloud business, increasing the market. That activity went into overdrive following the Q4 release and has the market on track to move virtually straight up in the near to short term. Three analysts boosted their price target days before the release, and 11 have been picked up in the first 18 hours since the release, and they are all above consensus.

The consensus is near $110 and suggests the market will move lower but is up 16% in the last 30 days, is lagging the market, and the range of new targets has the market trading between $130 and $150. That’s a minimum of 12% upside on top of the post-release surge, which has the stock at a new all-time high. 

The chart is favorable, but there is risk. Price action can’t move vertically long, and resistance will eventually kick in. Investors looking to get into Oracle now face the risk of whipsaws and pullbacks. However, pullbacks that result in confirmed support should be viewed as potential entry points.

The growth of AI and the cloud supports the company’s long-term outlook, including a sustainable dividend, dividend growth, and share repurchases. The stock only yields about 1.35% at current levels but has a healthy outlook for growth. The company is paying only 28% of the F24 consensus estimate (which is too low) and has been increasing for 8 years at a double-digit pace.