For years, the database software developer lagged behind tech rivals in building cloud technology that met the demands of the modern-day enterprise. But that’s changing, and Wall Street is quite pleased with what it sees from Larry Ellison’s 46-year-old company.
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Oracle shares climbed 4.8% on Wednesday to $122.24, closing at a record for a fifth straight day and the eighth time this month. The stock is up 73% over the past 12 months, outperforming all large-cap enterprise tech stocks over that stretch other than Nvidia. The shares are up over 50% in 2023, which would mark the best year for shareholders since the dot-com boom of 1999.
The company got its latest boost this week after reporting stronger-than-expected earnings and revenue, prompting nods of approval from analysts. Goldman Sachs upgraded its rating on the stock to the equivalent of hold from sell.
“Let’s give him credit where it’s finally due,” said Eric Lynch, managing director of Scharf Investments, which held $163 million worth of Oracle shares at the end of the first quarter, according to regulatory filings. “The upside case is finally coming through.”
The story that’s exciting investors these days? No surprise. It’s about artificial intelligence.
Prior to the latest rally, Oracle was largely viewed as a technology has-been rather than as an innovator. In the red-hot cloud market, it had lost market share to Salesforce in selling software to sales reps, and was a bit player in infrastructure as a service (IaaS), where Amazon, Microsoft and Google were leading the way. Oracle picked up significant business from TikTok and Zoom, but big names were mostly going elsewhere.
Now, Oracle is seeing accelerated growth thanks to the craze around generative AI, the technology that can craft images or text from a few words of human input. The company is a significant investor in Cohere, an enterprise-focused generative AI startup whose technology can power copywriting, search and summarization.
Cohere is valued at over $2 billion and ranked No. 44 on CNBC’s 2023 Disruptor 50 List.
On the earnings call, Ellison told analysts that customers have “recently signed contracts to purchase more than $2 billion of capacity” on what Oracle calls its Gen 2 Cloud.
After its market cap fell below that of the younger Salesforce in 2020, Oracle reclaimed the lead over its longtime rival the following year, and now it’s not even close. Oracle is worth $330 billion as of Wednesday’s close, while Salesforce’s market cap sits at $204 billion.
Oracle is even growing faster, with revenue in the latest quarter increasing 17% from the prior year, compared to 11% growth at Salesforce.
Cloud infrastructure revenue at Oracle surged 76% from a year earlier, surpassing growth of 55% the prior quarter. That’s one data point that analyst Kash Rangan and his Goldman Sachs colleagues highlighted in their upgrade.
The analysts said the acceleration is “a clear signal that Oracle’s advertised price/performance advantage vs. the hyperscalers is resonating with the market (both net new and existing customers), which should position the company for durable share gains despite its late entry into IaaS.”
Even with the cloud infrastructure growth, Oracle management called for no change to capital expenditures in the new 2024 fiscal year, which bodes well for free cash flow generation, the Goldman analysts said.
Like several enterprise-focused technology companies, Oracle started selling cloud-based versions of applications that clients had previously run in their on-premises data centers. The company expanded its reach with the $9.1 billion acquisition of NetSuite in 2016.
Rebuilding the guts of the data center was less straightforward, and Oracle quickly fell behind. In 2009, Ellison dismissed the rise of cloud-computing branding.
“Our industry is so bizarre,” he said. “You know, they just change a term, and they think they’ve invented technology.”
Ellison made a bad bet. Between 2010 and the end of 2020, not only did Oracle’s stock badly underperform Amazon, Microsoft and Google, but just buying an S&P 500 tracking index would have returned almost double what an investor would’ve have made on Oracle.
Oracle eventually came around to charging organizations for servers, storage and networking services based on how much they used, following in the path of the market leaders.
The company introduced the Elastic Compute Cloud in 2015, nine years after the launch of Amazon Web Services’ foundational EC2 computing service. Then, in 2018, Oracle debuted its Gen 2 cloud portfolio.
In October Ellison said he thought Oracle had been copying rivals, so he canceled the existing cloud effort and pushed for a new approach. As organizations look for ways to reduce IT spending, Ellison on Monday told analysts that Oracle’s cloud database can be faster and cheaper than what’s available from AWS.
Lynch, whose Los Gatos, California-based investment firm took a stake in Oracle in 2011, recalled that people used to poke fun of Ellison for his earnings call routine of reciting the names of small-time operations that had signed up for Oracle’s cloud services. The company was still appealing to value-oriented investors because it had a strong balance sheet due to a huge roster of legacy clients, and boasted stronger profit margins than many of its peers.
Lynch acknowledged that Oracle appears to be enjoying its position within the AI gold rush and said he doesn’t expect such high growth in cloud infrastructure to persist.
For the time being, Ellison can enjoy his company’s bragging rights in Silicon Valley at a time when so many high-profile and once high-flying neighbors are downsizing for the first time in their history. Oracle has had some layoffs but a smaller number.
On Oracle’s earnings call this week, CEO Safra Catz took a minute to express gratitude to the company’s customers and employees.
“Some of you are new, and many of you have been with us for years, in fact, even decades, and I think you all see that our best days are in fact ahead of us,” she said. Catz then thanked Ellison “for leading with brilliance, determination and vision and allowing us to all be part of this incredible journey, which is just getting started.”