Oracle says artificial intelligence is boosting demand for its cloud products at an astronomical rate. But keeping up with what founder Larry Ellison called a "gold rush" is proving tougher than expected — and that's keeping Oracle stock earthbound.
Oracle shares fell sharply after the company's fiscal second-quarter results showed slower revenue growth for Oracle's cloud infrastructure business. The stock drop underlined concerns about the company's ability to capture the robust demand for cloud-computing horsepower brought by the frenzy over generative AI.
"There's this gold rush toward building the world's greatest large language model," Ellison, Oracle's Chairman, said on the company's earnings call. "And we are doing our best to give our customers what we can this quarter, and then dramatically increase our ability to give them more and more capacity each succeeding quarter."
The 46-year-old database software giant is fighting to establish itself as a player in cloud computing, a market is dominated by Amazon, Microsoft and Alphabet's Google.
AI presents an opportunity to grab more market share. But Oracle stock has bounced around in recent months, as investors debate the tech behemoth's ability to be an AI winner.
Oracle Stock: AI Push
The company launched Oracle Cloud Infrastructure, or OCI, in 2016, part of the company's yearslong transition to cloud-based services. OCI is growing, but Oracle's November quarter suggested it's losing momentum. OCI revenue grew 52% to $1.6 billion in the quarter, down from 66% in the August quarter, and 76% in the May quarter. The trend is worrisome for some analysts.
"The lower OCI growth will worry investors, as this is the main investment story," Barclays analyst Raimo Lenschow wrote in a Dec. 11 client note.
Oracle Chief Executive Safra Catz offered an upbeat view on the company's earnings call, saying demand for its cloud infrastructure and generative AI services is "increasing at an astronomical rate." Oracle said remaining performance obligations climbed to more than $65 billion, exceeding annual revenue.
Catz said the only "limiting factor is our ability to get the data centers handed over and filled up fast enough."
Ellison said Oracle will soon expand 66 existing cloud data centers and build 100 more, including 20 connected to Microsoft Azure. Microsoft and Oracle have partnered on some cloud and database products.
Oracle is ramping up spending as well. The company's capital expenditures totaled about $2.4 billion for the six months that ended Nov. 30. Catz said the company expects to spend about $8 billion for the fiscal year, which is now halfway over.
Oracle Seeks GPU Edge
Earlier this year, Ellison said Oracle is spending "billions" on graphics processing units from Nvidia to crunch data for AI language models.
Moreover, the company's AI push has won over some Wall Street analysts. For instance, UBS upgraded the stock in late August.
"We are increasingly confident that Oracle has carved out an underappreciated edge in terms of its GPU capacity as well as its OCI architecture," UBS analyst Karl Kierstead wrote at the time.
The momentum powered Oracle stock to roughly 50% growth in the first nine months of the year. But ORCL's 2023 gains have pared down to about 29%, as of Dec. 20, following the last earnings report.
Sizing Up The Competition
But there's good news for Oracle. Despite the recent sales growth slowdown, OCI is growing at a much faster rate than recent quarters for Amazon Web Services and Microsoft Azure. However, Oracle is still playing catch-up.
Amazon Web Services captured an estimated 33% of cloud spending for the three months ending in September, according to an October report from Synergy Research Group. Microsoft ranked second with 23% of market share. The report placed Oracle among "tier two" cloud providers.
Plus, the market leaders are making big AI bets of their own. Microsoft put itself in pole position to start the year, with a $10 billion investment in OpenAI, the startup behind ChatGPT. Both Microsoft and Amazon, meanwhile, are developing their own AI training chips. Amazon also has a deal to invest up to $4 billion in Anthropic, a major OpenAI rival.
Further, BofA analysts expect Amazon, Microsoft and Google to spend $116 billion on cloud-related capital expenditures next year. That's up 22% from the pace this year, according to a November client note.
Supply Constraints
Moreover, ORCL shares fell sharply in late October after executives detailed challenges building AI-focused data centers — including chip constraints — during a customer event. Its earnings report could add to those concerns.
CFRA analyst Angelo Zino, who has a neutral hold rating for Oracle stock, said his firm "remains on the sidelines" on ORCL stock. He cited Oracle's need to step up spending for OCI capacity and "inferior growth to other cloud/software-as-a-service providers."
Separately, UBS' Kierstead noted in a Dec. 12 client note that "GPU constraints are an industrywide issue." But with Oracle detailing capacity constraints for two straight quarters, investors may "begin questioning ORCL's competitiveness in terms of standing up a modern AI infrastructure."
Still, UBS maintained a buy rating for ORCL.
On the earnings call, Ellison said the company is finding ways to meet demand. For example, Oracle was able to secure the Nvidia GPUs to support Elon Musk's company xAI, whose Grok large language model launched last month.
"We gave them quite a few," Ellison said on the earnings call. "But they wanted more, and we are in the process of getting them more."
Oracle Stock: Beyond AI
There are other hurdles for Oracle stock. For one, the company said it is still seeing revenue headwinds from integrating Cerner, the health care data company the company acquired last year for $28 billion.
On the other hand, Oracle is an established behemoth with more than 400,000 global customers across its Oracle Database, NetSuite and other enterprise applications. Oracle's cloud revenue including from software sales grew 25% to $4.8 billion in its November quarter.
Analysts with TD Cowen described database customers as sticky, and expects Oracle to maintain its share in that market. For its cloud infrastructure business, meanwhile, the analysts see the second-half of Oracle's fiscal year as a better setup.
"High-bandwidth, low-latency infrastructure delivery is driving broad adoption of workloads onto OCI," TD Cowen analyst Derrick Wood wrote in a Dec. 11 note.
Oracle Stock: Betting On 50% Growth
Oracle continues to eye opportunities in the cloud era. Catz, for instance, said on the earnings call that it is "just the beginning" of companies transitioning on-premise data centers to the cloud.
"Again, the demand is extraordinary," Ellison added. "We can build the data centers relatively fast, and I expect the OCI growth rate to be over 50% for a few years."
Evercore ISI analyst Kirk Materne kept a buy rating on Oracle following the report. If OCI grows around 50% in upcoming quarters, he wrote, "the risk/reward skews materially to the upside at current levels."
But Oracle will remain in "show me mode" for many investors in the meantime, he added.
