Software Giant Oracle (NYSE:ORCL) stock has caught investors’ attention in 2023. It has easily outperformed its large-cap peer group, gaining almost 40% year-to-date. Not just that, but the stock reached its all-time high of around $127 after delivering an outstanding Q4 beat in June. Well, now the big question is, is it too late to buy the stock? The answer is indeed surprising — no, it’s likely not too late!
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I believe Oracle stock has a long runway for growth based on robust high-digit AI growth opportunities and Oracle’s clear edge versus its peers as it continues to invest and scale its AI and cloud capabilities.
Solid Cloud Momentum Led to Upbeat Q3 Results
On June 12, Oracle delivered outstanding Q4 and Fiscal 2023 results. Q4 revenues jumped 17% year-over-year to $13.8 billion, beating Wall Street’s expectations by about $100 million. Adjusted earnings of $1.67 per share also surpassed consensus estimates of $1.58.
The highlight of the quarter was some very impressive Cloud numbers. Organic Cloud revenues jumped 33% year-over-year in constant currency, while Cloud Infrastructure (IAAS) growth came at 77% year-over-year, driven by AI momentum. Operating margins improved, too, expanding by 200 basis points sequentially to 44%.
A free cash flow margin of 27% was the cherry on the cake. The reduced capital expenditures reassured investors of the sturdiness of its free cash flows, which continue to grow at a rapid pace (68%). It’s no wonder then that the stock received upward price target revision from several Wall Street analysts and rating upgrades too.
On top of that, the company gave out a positive outlook, putting investors’ concerns to rest over increasing capital expenditures, a possible margin compression, and weakness in its core businesses.
For the upcoming first quarter, the company expects total revenues to grow at 8%-10% year-over-year, driven by impressive growth in IAAS. Notably, capital expenditure expectations have flattened for Fiscal 2024 after nearly doubling year-over-year in Fiscal 2023. As a result, the company’s free cash flow margin should remain high.
Long-Term Catalysts: Cloud Business at an Inflection Point, Aided by AI
The robust Cloud business momentum that Oracle witnessed is not a one-off event. The AI boom story is here to stay. During the earnings call, management laid out its expectation for 30% Cloud business organic growth during Fiscal 2024.
The company is bullish on the AI space and looking to scale up its AI investments in a big way. Oracle is spending massively on AI technology, creating efficient networks and databases, buying high-end graphics processing units GPUs and chips from Nvidia (NASDAQ:NVDA), and entering into multiple partnerships. Recently, to add generative AI features across its software portfolio, it collaborated with an AI start-up company named Cohere.
Despite the fact that Oracle jumped later than its peers into the AI bandwagon, it continues to attract both new and old customers at a fast pace. What is giving Oracle an edge over its rivals like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) is its differentiated AI services that include payments based on customer usage.
The resulting cost savings have made it a preferred choice for its clients. Further, it has made several performance upgrades that have made its services more economical and faster for its customers when compared to its peers.
Digging deeper, Oracle reported impressive growth in its Cloud business, whereas Amazon Web services reported a much lower growth rate at around 11%. This implies that Oracle could be gaining market share from Amazon at a rapid pace.
Is ORCL Stock a Buy, According to Analysts?
As per TipRanks, analysts are cautiously optimistic about Oracle stock, giving it a Moderate Buy consensus rating based on 13 Buys and 12 Holds. Oracle stock’s average price forecast of $129.37 implies 11.6% upside potential.
ORCL’s Valuation is Reasonable
In terms of the stock’s valuation, Oracle is trading at a forward P/E ratio of 21.1x, reflecting a 9.8% discount to its peer-group median of 23.8x. For the sake of comparison, its biggest competitor Amazon is currently trading at a much higher P/E ratio of 83.3x. Given the strong fundamentals and earnings growth, I believe that Oracle stock is fairly valued at current levels.
Takeaway: Should You Consider ORCL Stock?
The AI industry is still in its nascent stage. The supernormal growth in the AI space will ultimately normalize. However, that stage will come after a few years. In the meantime, Oracle will continue to gain market share based on its superior AI services driven by innovations and investments.
What’s even more enticing is that its continuing innovations make its software services more cost-effective for its clients. Therefore, I will consider buying the stock with a long-term view.
