Oracle is winning over investors and analysts as it sees a resurgence in sales growth driven by artificial intelligence-fuelled demand.
Shares in the software giant, which was co-founded 47 years ago by current executive chairman and chief technology officer Larry Ellison (80), are up almost 60% this year. A chunk of those gains came after last month’s estimate-beating earnings and forecast for sales to roughly double over the next five years.
Two recent analyst upgrades have left Wall Street at its most bullish in more than six years, with 24 firms rating Oracle shares a buy.
The newfound popularity has come as Oracle cements its status as an AI winner. It’s been focused on expanding its cloud infrastructure business — which competes with Amazon.com, Microsoft and Google — and has developed a reputation for success with generative AI workloads, helping to boost its overall revenue growth.
“Growth is inflecting higher, at a pace much faster than we’ve been used to at Oracle, and that’s a huge positive,” said Dan Eye, chief investment officer at Fort Pitt Capital Group. “At the same time, it’s been something of an under-the-radar name, and while the valuation has recently risen, it is still cheaper than other tech names.”
Even after a great year, there’s still some way to go to shake off Oracle’s underdog status compared with larger cloud players like Microsoft and smaller rivals like Salesforce. Over the past five fiscal years, Oracle’s revenue growth has averaged about 6%, compared with 14% for Microsoft and more than 20% for Salesforce.
Acceleration
However, Oracle is expected to see revenue growth of about 10% in the current financial year and a further acceleration in 2026 and 2027, according to an average of analyst estimates. That’s mainly due to growth in its cloud infrastructure business, where sales are forecast to jump 55% this year.
Oracle’s stock rally this year — adding more than US$170-billion in market value — has boosted its valuation to 26x forward earnings, up from about 18x at the beginning of the year. That’s still cheaper than some larger peers such as Microsoft and Amazon, and it isn’t deterring analysts and investors.
“We find it hard not to put a 25x multiple on a company set to grow faster than Salesforce and Adobe,” Melius Research analyst Ben Reitzes wrote in a report on Monday, upgrading his rating on Oracle to buy from hold. “Investors will continue to reward Oracle for faster revenue growth.”
Reitzes’s report followed an upgrade by JMP Securities analyst Patrick Walravens, who raised his rating to market outperform from market perform on 10 September, citing accelerating revenue growth and expectations for further market share gains in cloud infrastructure services.
Still, even as Wall Street analysts have turned more bullish on the stock in recent months, they prefer other Big Tech names. About 63% of analysts covering Oracle have a buy rating, compared to Alphabet’s (Google’s) 83%, Microsoft’s 96% and Amazon’s 95%. — Jeran Wittenstein, (c) 2024 Bloomberg LP