AI Optimism Pushes Oracle to a Record High

Shares of Oracle (ORCL) rallied to a record high today and may move even higher after Wolfe Research upgraded the stock to outperform.  Oracle is up more than +40% this year as optimism has been building that investment in artificial intelligence (AI) will benefit the company. The release of Oracle’s Q4 earnings after today’s close may validate that AI has the potential to boost demand for the company’s cloud-computing business.

Although Oracle trades at a record high, it trades at a discount to other AI software stocks. Bank of America has ranked Oracle second to Microsoft (MSFT) among software companies with AI leadership. Also, Piper Sandler said that AI and cloud tailwinds could mark “the beginning of a new era” at the company. Oracle is the first provider to host Nvidia’s DGX Cloud Service, and Bloomberg reported last week that Oracle and Nvidia (NVDA) are among the strategic investors behind AI startup Cohere.

After years of stagnating growth, optimism is building about Oracle’s position within AI.  Wealth Consulting Group said, “Oracle’s rally to a record high is justified based on its fundamentals, and if the AI impact is really as good as some are predicting, then the stock may even be undervalued.” Investors will look at today’s Q4 earnings results from Oracle to see if artificial intelligence workloads are boosting cloud growth.

The AI frenzy has been a bullish factor in fueling gains in mega-cap technology stocks this year. However, that rally has also resulted in elevated valuations for some companies, such as Microsoft and Nvidia, making Oracle look like a bargain.  Oracle trades at about 20 times estimated earnings.  While this is above its 10-year average of 14, it is at a discount to the 27 multiple of the S&P 500 tech sector index.  In comparison, Microsoft trades at nearly 30 times forward earnings, and Nvidia trades almost 46 times forward earnings.

Last quarter, Oracle’s cloud sales failed to meet lofty expectations, which has kept analysts from becoming outright bulls on the stock.  Just 39% of analysts advise buying the stock, while the consensus rating, a proxy for its ratio of buy, hold, and sell recommendations, is at 3.6 out of 5, making it one of the lowest-rated stocks in the Russell software index.

However, market sentiment toward Oracle stands to improve if today’s earnings results point to a sustainably higher growth outlook.  Bloomberg Intelligence estimates Q4 cloud infrastructure product sales increasing by more than 50%.  Laffer Tengler Investments said, “If Oracle can put up the growth we’re anticipating, we think the stock can continue to perform well.” 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.