Oracle Corporation ORCL has been making significant strides in the cloud computing arena, prompting investors to reassess the company's potential as a long-term investment. The company's strategic pivot from traditional on-premises solutions to cloud-based offerings marks a significant shift in its business model.
Oracle's cloud strategy, encompassing infrastructure, platform and software-as-a-service solutions, has been a key driver of its recent growth trajectory. In fiscal 2024, the cloud services and license support segment dominated Oracle's revenue stream, contributing $39.3 billion or 74% of total revenues.
However, investors must consider whether this cloud growth alone justifies a buy decision. While Oracle's cloud business is expanding rapidly, it still represents a smaller portion of the company's overall revenues compared to its legacy software licensing and support services. The transition to the cloud also involves significant investment and potential margin pressure in the short term.
ORCL's Cloud Strategy: A Compelling Investment Opportunity?
The company's aggressive strategy focuses on forging strategic partnerships and expanding its technological capabilities, positioning itself as a formidable player in the competitive cloud market.
At the forefront of Oracle's cloud expansion are its partnerships with tech giants Microsoft MSFT and Alphabet GOOGL-owned Google. The collaboration with Microsoft Azure allows customers to run workloads across both cloud platforms, enhancing flexibility and potentially attracting enterprises seeking multi-cloud solutions. Similarly, Oracle's alliance with Google Cloud, spanning 11 global regions, facilitates seamless integration between Oracle Cloud Infrastructure (OCI) and Google's technologies. This partnership, which eliminates cross-cloud data transfer charges, could significantly lower barriers to adoption and accelerate application migrations.
Oracle projects robust growth for its cloud business, with total cloud revenues expected to increase by 21-23% in constant currency for Q1 fiscal 2025. Moreover, the company anticipates its cloud infrastructure services to outpace fiscal 2024's growth by 50% in the coming year. These projections underscore Oracle's commitment to cloud transformation and its potential to reshape the company's market position in the competitive tech landscape.
The Zacks Consensus Estimate for ORCL’s fiscal 2025 revenues is pegged at $57.75 billion, indicating year-over-year growth of 9.04%. The consensus mark for fiscal 2025 earnings is pegged at $6.19 per share, up a penny in the past 30 days. The figure indicates year-over-year growth of 11.3%.
Image Source: Zacks Investment Research
Strategic acquisitions, such as the $28 billion purchase of Cerner, demonstrate Oracle's commitment to expanding its cloud capabilities in key verticals like healthcare. This move could further solidify Oracle's position in the enterprise cloud market.
Furthermore, the company's focus on autonomous database technology and AI-driven cloud services positions it well for future growth in emerging technologies.
Recognizing the need for strategic partnerships to stay competitive in the fast-paced AI market, Oracle has formed alliances with key players in the industry. Oracle has announced a major collaboration with Palantir Technologies PLTR, certifying Palantir's Foundry Platform and Artificial Intelligence Platform on Oracle Cloud Infrastructure across all distributed cloud deployment options. This partnership combines Oracle's distributed cloud, AI infrastructure, and sovereign AI capabilities with Palantir's AI and decision acceleration platforms, aiming to accelerate AI initiatives for businesses and governments.
Oracle's Gen2 Cloud infrastructure, designed to support AI and machine learning workloads, could be a significant differentiator in the increasingly AI-centric tech landscape.
Shares of ORCL have gained 32.8% year to date compared with the Zacks Computer and Technology sector’s growth of 22.1%. While this performance may be encouraging for investors, it's important to consider whether the stock's current valuation accurately reflects the company's long-term growth potential and ability to navigate the competitive landscape.
Year-to-date Performance
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Stiff Competition, Stretched Valuation Remain Overhangs
Oracle operates in a highly competitive market, facing intense competition from established tech giants like Microsoft, Amazon and Google as well as newer players like Snowflake and Databricks.
While Oracle has a strong foothold in the database management and ERP software markets, its competitors are making significant inroads in the cloud space. AWS, Google Cloud and Microsoft Azure combined accounted for a whopping 67% of the $76 billion global cloud services market in the first quarter of 2024, according to new data from IT market research firm Synergy.
It is also important to consider whether the stock's current valuation accurately reflects the company's long-term growth potential and ability to navigate the competitive landscape.
ORCL is trading at a premium with a price/book of 41.82X compared with the Zacks Computer-Software industry’s 9.33X, reflecting a stretched valuation.
ORCL’s Price/Book Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Conclusion
Oracle's cloud growth strategy, financial projections and technological advancements make it a compelling case for potential investors. The company's strategic partnerships, focus on AI and machine learning and expansion into key verticals demonstrate a forward-thinking approach, making the stock worth buying in the near term.
Oracle currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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