The tech giant’s cloud strategy has been successful in capturing AI demand.
Shares of storied technology company Oracle (ORCL -0.63%) have had a great year. The stock hit a 52-week low of $99.26 last December before starting to rise in 2024. Just a few weeks ago, the stock hit an all-time high of $178.61.
Oracle originally became famous for its database software. Currently, the company is focusing on cloud computing, which is driving the stock price up significantly. why? The cloud is an ideal place for artificial intelligence (AI) because AI requires large amounts of data and computing power.
With the rise of AI and Oracle’s acquisition of the business of ChatGPT creator OpenAI this year, it’s no surprise that the venerable tech giant’s stock would be of interest to investors. Does that mean now is the time to buy Oracle stock? This time, I researched the company to answer that question.
Oracle Business Performance
Oracle’s cloud computing business is among the top 10 in the world and has recorded an impressive string of customer wins. In addition to the contract with OpenAI, Oracle’s cloud infrastructure was selected by the U.S. Army to modernize its human resources systems. The UK government also chose Oracle’s cloud this year.
With these customer wins, Oracle’s cloud revenue increased 21% year-over-year to $5.6 billion in the first quarter of fiscal 2025 ended August 31. As a result, cloud revenue increased 20% year over year to $5.3 billion, further improving the company’s fourth fiscal year results.
Revenue for the entire first quarter reached $13.3 billion, up from $12.5 billion a year ago. With a strong start to fiscal 2025, Oracle expects full-year revenue to increase by double digits and cloud infrastructure revenue growth to accelerate into fiscal 2024.
Adding to Oracle’s revenue growth, industry forecasts predict the cloud computing market will grow from nearly $600 billion last year to more than $2 trillion by 2032.
Oracle’s AI Investments
Perhaps nothing outweighs Oracle’s future potential like AI. Cloud computing data centers are a critical component of AI infrastructure. So Oracle is pouring resources into expanding its cloud footprint.
Co-founder and CTO Larry Ellison said the company has more than 160 cloud data centers around the world and plans to add more. This month, the conglomerate announced plans to spend $6.5 billion to build data centers in Malaysia. Ellison declared that Oracle will eventually have more than 1,000 data centers.
To create advanced AI that can perform tasks such as identifying cancer, Oracle is building large and complex data centers. One of them will be so large that it will require three small modular reactors to power it.
Oracle is able to make such investments thanks to its superior operating cash flow. By the end of the first quarter, the company had generated $19.1 billion in cash flow from operations over the subsequent 12 months, easily covering its $7.9 billion in capital expenditures (capex) for the same period. This is important because as the company expands its data center footprint, management expects 2025 capital expenditures to be double that of 2024.
This brings us to another of Oracle’s strengths: free cash flow (FCF). The company generated FCF of $5.1 billion in the first quarter and $11.3 billion in the trailing twelve months. FCF is used to fund Oracle’s dividends, and the current yield is 0.9%, so this is also important for investors to know. The company’s FCF easily covered its first quarter dividend payment of $1.1 billion, meaning the dividend is solid.
Deciding if Now is the Time to Buy Oracle Stock
Given Oracle’s traction in the cloud and AI markets and its strategy to continue to strengthen its position through data center expansion, the company is a worthy long-term investment. The question is whether now is the time to invest, given that stocks have recently reached record highs.
Oracle’s price-to-earnings ratio (P/E), which is used to evaluate stock valuations, tells you how much investors are willing to pay for a dollar’s worth of earnings. Oracle’s high P/E ratio compared to other veteran technology cloud giants Microsoft and IBM suggests that the stock is overvalued.
Data by YCharts.
Looking at what Wall Street is thinking, the consensus among Wall Street analysts is an Overweight rating on Oracle stock with a median price target of $190. As a result, Oracle’s stock price is believed to have more room to rise, even though it’s at a record high.
Although the stock has pulled back a bit from its highs, the rising P/E ratio suggests now is not the best time to buy. Wait for Oracle’s stock price to fall further before considering investing.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Robert Izquierdo has held positions at Amazon, International Business Machines, and Microsoft. The Motley Fool has positions in and recommends Amazon, Microsoft, and Oracle. The Motley Fool recommends International Business Machines and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
