See Why Oracle’s Cloud Infrastructure Growth Demands Attention

Key Points

• Oracle shares have jumped substantially in the past two weeks on the back of its cloud infrastructure business.
• Partnerships with all the hyperscaler companies show that they respect Oracle's position.
• The company's valuation is on the upswing but still looks favorable compared to hyperscaler players.

Oracle’s NYSE: ORCL stock has had a great two weeks and an impressive overall return in 2024. Shares are up 20% since Sept. 9, and the stock has provided a total return of 61% this year.

The recent rise in the stock comes as the tech firm has delivered strong results and a good outlook in the AI, data center, and cloud markets. I’ll detail why the company is showing strong performance in this space, which many didn’t expect.

Oracle’s Entrenched Position in Key Enterprise Solutions

In its most recent earnings report, Oracle saw its cloud infrastructure revenue increase by 45%. Oracle has seemingly been able to ride the wave in this space better than other legacy tech companies. This is largely because the company has a strong position with large enterprises. It is one of the market leaders in enterprise planning software (ERP).

ERP software is essential to businesses because it helps show what is going on in all the key departments of a business in one place. This helps improve decision-making in a company, rather than having the finance and sales departments' data be separate.

Oracle’s strong position in this space makes continuing to work with it attractive for companies that want to improve their operations using AI. Transitioning to a different ERP software is extremely cumbersome for companies and would greatly affect their ability to operate while they do so.

For this reason, working with Oracle has become vital for hyperscaler companies. In many cases, this makes more sense than trying to replace Oracle, as customers don’t want to upend their operations to integrate AI.

Oracle: Building Relationships and Competing With Hyperscalers

Oracle recognizes that its customers also want to use cloud services from other companies. This is why it has relationships with Microsoft NASDAQ: MSFT, through its Azure platform, and recently announced partnerships with AWS and Google Cloud. These partnerships allow customers to use their data in Oracle’s platform and hyperscaler’s platforms.

This means they can decide which to use for certain purposes and which to use for others, giving them the best of both worlds. It also increases reliability. If Oracle or AWS's cloud services fail, the other can be used in the meantime. This will reduce the negative impact on the company's operations.

These new contracts mean that customers will be able to access Oracle’s “database technology within every hyperscaler’s cloud." The fact that these massive firms see value in working with Oracle further demonstrates the legitimacy of its place in this market.

It is also good to see that the company is attracting small AI firms with its infrastructure. It is not just growing in this space due to its deep entrenchment in large enterprises' systems. Oracle competes with the hyperscalers too, so it needs to continue to grow its capabilities to not be reliant on partnerships.

The future demand signaled in the company’s financial statement was also impressive. Its RPOs, or revenue performance obligations, increased by 53%. This is the contract value that the company still needs to deliver. The company said these agreements will boost revenue growth for the rest of the fiscal year, which is now in the second quarter.

Oracle’s Valuation Is Increasing But For Good Reason

One data point that should be mentioned is the significant increase in the company’s valuation. Since the beginning of the year, the company’s forward price-to-earnings (P/E) has gone from 18x to 26x. That’s an increase of nearly 45%.

It’s not surprising. The market is willing to pay more for each dollar of Oracle's earnings because it now trusts its strong position in the hot AI and data center space. It has also solidly increased its margins over the past year. However, the company now looks significantly more expensive than it once did. It has moved from trading at about even with the S&P 500’s forward P/E to around 20% above it.

However, it still trades favorably compared to the average forward P/E of Alphabet NASDAQ: GOOG, Amazon NASDAQ: AMZN, and Microsoft. That figure sits at 30x. Its forward valuation is also in the middle compared to the overall U.S. information technology sector.

Since the company’s earnings report, it has received a rash of analyst price target increases. Multiple analysts, including HSBC, see up to 25% upside in Oracle’s stock price. Given its improving position Oracle feels like a strong long-term play on the AI and data center thesis.