Predicting Oracle's Stock Position in the Next Year
Oracle, the renowned cloud computing giant, has achieved remarkable success in the past year, soaring over 48% compared to the Nasdaq Composite's 25% increase (as of writing). This triumph is primarily attributed to the surging demand for Oracle's cloud infrastructure, tailored for handling artificial intelligence (AI) workloads.
However, Oracle's rise hasn't been without repercussions. The stock now trades at an elevated 45 times trailing earnings, a stark contrast to its five-year average earnings multiple of 24. Despite analysts' lukewarm expectations, with a median 12-month price target of $205 from 39 analysts, there's a chance that Oracle might outperform these forecasts.
The AI Infrastructure Boom: A Double-Edged Sword
Oracle's cloud infrastructure business is set for astronomical growth, as revealed by the astronomical figures. Gartner estimates the global infrastructure-as-a-service (IaaS) market to have been worth an impressive $140 billion in 2023. With generative AI applications proliferating in the cloud, this market is poised for exponential growth. Goldman Sachs, furthermore, predicts IaaS revenue to surge to an astounding $580 billion by 2030.
Oracle's IaaS revenue grew a staggering 52% year-over-year to reach $2.4 billion in the second quarter of fiscal 2025. However, capacity constraints limited the gains, mainly due to higher-than-expected demand for cloud infrastructure powered by GPUs, such as those from Nvidia.
In response, Oracle is prioritizing a global expansion of its cloud capacity. Currently, it serves 17 cloud regions worldwide, with plans to expand this number to 35 in partnership with tech giants like Microsoft, Amazon, and Alphabet's Google. Moreover, Oracle has entered into a joint venture with SoftBank, OpenAI, and MGX to build 20 AI data centers in the U.S. Initial investments will reach $100 billion, with a potential total of $500 billion over the next four years.
Gauging Oracle's Potential Upside
Oracle's valuation currently appears rich, following its stellar performance in the past year. The silver lining is that the company might be able to justify this valuation, thanks to its substantial remaining performance obligations (RPO). These RPOs represent the value of unfulfilled contracts that will be recognized as revenue in the future.
If Oracle achieves $7.03 in earnings per share in fiscal 2026, maintaining a price-to-earnings (P/E) ratio in line with the Nasdaq-100 index's earnings multiple, its stock price could balloon to $233. This represents a 26% gain from current levels. While Oracle may not surpass the consensus price target by a significant margin, its upside potential should not be underestimated.
Investors on the lookout for artificial intelligence (AI) stocks might want to consider Oracle as a promising addition to their portfolios. With its strategic focus on AI data centers and aggressive expansion plans, Oracle stands poised for substantial revenue growth and sustained stock prices appreciation.
Investors interested in AI stocks might want to consider investing more money in Oracle, given its focus on building AI data centers and aggressive expansion plans. If Oracle can maintain its earnings performance, its stock price could potentially increase by 26%, justifying its current rich valuation in the finance market.
