Phillip Faraone
Investment Thesis
Oracle Corporation’s (NYSE:ORCL) strong fiscal Q1 earnings performance this week shows the company is in an incredible position to ride the AI wave, as they are becoming core to the AI ecosystem (very much the vendor or record). In the traditional database market, they are already the vendor of record. Now this is the case in AI.
As of the time of writing, Oracle stock is up roughly 11% following their strong performance. I have been concerned with the momentum around AI, as I noted in my last write-up. This quarter dispelled my concerns.
Oracle’s cloud services are the secret behind their success. Revenue from this segment rose 21.3% year-over-year, with their cloud business reaching $5.6 billion in quarterly revenue.
Oracle is evolving into an essential provider, like a foundation layer, for companies focused on AI. Their database systems are now key to supporting companies like OpenAI, AWS, and Google Cloud to lay the groundwork for future AI developments. AWS and Google Cloud are technically competitors to Oracle. It shows how necessary their software is to the future of AI.
Oracle’s technology serves a foundational role, similar to how GPUs have become essential to AI. Companies need efficient cloud-database solutions to support AI workloads, and Oracle is well-positioned to meet this demand.
Given their excellent performance in Q1 and the stickiness of their database software in this space, I now think Oracle is a strong buy. The company’s AI-driven cloud offerings, partnerships, and expanding database market make their technology a must for the future of AI.
Why I’m Doing Follow-Up Coverage
Since my last write-up in July, Oracle shares have been on a tear, up 11.92% and trouncing the market’s -0.98% return.
In July, I discussed how Oracle’s partnerships, particularly with OpenAI, positioned the company well to capitalize on AI growth, despite what I saw as the beginnings of a general slowdown.
At the time, I thought Oracle was a buy. However, the broader market has since sold off, which previously dragged Oracle’s shares down from their 52-week high (general sector sell-offs related to AI). Shares are still about 2% from their 52-week-high after the jump post-earnings, and I think this presents a unique buying opportunity. The fundamentals driving the company’s growth have accelerated, and the sell-off is more reflective of general market sentiment rather than Oracle-specific concerns (in fact, remaining performance obligations are up 53% YoY in Q1 showing accelerating book of business to convert to revenue). Given the strength of Oracle’s AI and cloud infrastructure offerings, I think the stock still has immense upside potential.
Oracle’s strategic $12 billion in partnerships they signed last quarter with companies such as OpenAI, offers a backbone for future AI development projects. I think we’re starting to see the revenue pan out.
The purpose of me doing this follow-up coverage is to show how Oracle is firing on all cylinders and is about to go on a run driven by AI. The AI revolution here is not dead.
I think it’s just starting.
Q1 Review
Oracle’s FY 2025 fiscal Q1 performance exceeded expectations, with non-GAAP EPS of $1.39 beating estimates by $0.06, and revenue of $13.3 billion surpassing projections by $60 million. The company’s cloud segment (which houses this AI database software) remains a massive driver, with total cloud revenue reaching that $5.6 billion figure I mentioned before.
Revenue By Division (Seeking Alpha)
Oracle generated the majority of its revenue from the Americas, with this region contributing $8.3 billion in sales, up by 6.8% YoY. The AI revolution is starting here in the US. It makes sense that their revenue growth is strong here too.
In EMEA, which is critical for Oracle’s growth due to the increasing adoption of cloud infrastructure and AI solutions in European enterprises and governments (sovereign AI), the tech giant reported a total of $3.2 billion in revenue here.
Revenue by Geography (Seeking Alpha)
During the company’s Q1 earnings call, management highlighted their expanded partnerships with tech giants like Alphabet Inc.’s (GOOG) (GOOGL) Google Cloud and Amazon.com, Inc.’s (AMZN) AWS which, as I highlighted before, are significant in their own right given they are competitors in many ways. The company claims it built large data centers equipped with ultra-high-performance RDMA networks and massive 32,000-node NVIDIA GPU clusters, which have contributed to their success within the AI training space.
Chairman, Founder and CTO Larry Ellison also emphasized that their multi-cloud partnerships will expand the popularity of Oracle’s differentiated technologies, particularly its database services:
The Oracle Database Cloud service running on Exadata and Exascale RDMA clusters, provides an order of magnitude, better performance, better scalability, better reliability, and better security than other databases. And it’s still the world’s only autonomous, fully self-driving database. Our large and loyal customer base understands and appreciates the many technical advantages of using the Oracle database. And those customers wanted us to define a way to make the very latest and best Oracle technology available on other clouds in addition to OCI.
With today’s AWS announcement, our customers will be able to use Oracle’s latest Exadata and Exascale RDMA clusters with the latest versions of our database software, from within the Microsoft Azure cloud, from within the Google Cloud and from within the AWS cloud. This will enable customers to use the Oracle database anywhere and everywhere. That has always worked well for our customers and for our database business. We believe our cloud partnerships with AWS, Microsoft, and Google will turbocharge the growth of our database business for years to come -Q1 Call.
Valuation
Oracle’s earnings per share is projected to grow at a compounded rate of 13.4% for FY 2025, increasing to 14.41% in FY 2026, and continuing to compound at a low double-digit rate over the coming years.
The trajectory shows incredible potential for them to be a compounder, but I actually believe these projections might be conservative. If we dive into the company’s remaining performance obligations (RPO), these surged by 53% year-over-year to $99 billion by the end of the first fiscal quarter. That’s impressive. It means their signed pipeline of work is growing faster than the company’s revenue. As soon as they scale up their solutions (and staffing) to accompany this RPO growth, we could see Oracle’s revenue (and EPS) growth accelerate.
In fact, if we dive into the tech giant’s forward revenue growth, we’re only expected to see revenue grow by 8.86% over the next 12 months, even though their backlog is growing north of 50% right now. There appears to be a big discrepancy here.
My sense here is that the revenue growth expectation is the variable that is out of whack. I think this will be a big catalyst as this gets hopefully revised up.
Looking at Oracle’s valuation, the company’s forward price-to-earnings (P/E) ratio is currently 24.74, just 6.76% above the sector median of 23.17. I think Oracle’s growth potential actually justifies a P/E ratio roughly 30% above the sector median, which would result in a forward P/E closer to 30.12. A premium P/E to reflect their premium valuation means that shares could have another 21.75% upside from here, not including dividends.
Risks
I touched on this in my last write-up. One of the key risks here for Oracle is the potential for a slowdown in the AI sector if the tools and models developed do not meet the high expectations set by analysts and investors.
AI has attracted enormous investment over the last 2 years, and companies are betting on its future capabilities.
If we see foundation AI models fail to deliver the expected results, companies may find themselves with large, inefficient investments.
The silver lining here is that while there is a risk some models may end up being less ideal for enterprise than we originally thought, the core thing that all models will need (now and in the future) is data.
AI models are data-hungry because they need to be exposed to diverse datasets to generalize well across different scenarios.
With this, I think that Oracle’s long-term prospects remain promising even under this risk. The company’s core strength lies in their database solutions, which will be needed, regardless of whether AI models reach their full potential immediately.
A rare constant in such a fast-paced industry: these models will still require large amounts of data.
Oracle, in my opinion, is the market leader here helping handle the storing, managing, and retrieving this data efficiently. I believe that the need for efficient and scalable data storage solutions is unlikely to diminish. This is really the heart of what makes Oracle’s services essential for companies that require AI.
Bottom Line
Oracle’s strong Q1 2025 performance, powered by 21% YoY cloud revenue growth, shows their strong momentum in AI and cloud infrastructure. Going forward, partnerships with other tech giants will keep Oracle’s role as a foundational player in AI secured.
With a forward P/E ratio barely above the sector median (despite this powerful growth), Oracle’s growth suggests that the stock should trade at a higher valuation.
Their strong RPO indicates robust future earnings potential.
With this promising quarter, I now believe Oracle’s shares are a strong buy (up from a buy). The company’s ever-expanding role in AI, combined with their strong revenue growth, makes their stock poised for strong upside potential. AI is like the Wild West or the Gold Rush. But one thing appears to be ever more certain: like GPU makers, Oracle is selling a Pickaxe for AI companies. That’s a place I want to be invested in.
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