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Shares of tech giant Oracle (ORCL) have surged 45% year-to-date and are up close to 67% in the last 12 months, valuing the company at a market cap of $322 billion. These outsized gains allowed Oracle co-founder Larry Ellison to become the third-richest person in the world, according to Forbes. As per SEC filings, Ellison is also the largest shareholder of Oracle, with a 42.9% share in the company.
ORCL stock has historically outpaced the broader markets. It has surged 192% in the last five years, after accounting for dividends. Comparatively, the S&P 500 index is up just 72% since June 2018. Similarly, Oracle stock has gained 396% in the last decade, dwarfing the gains of the S&P 500, which has returned 232%.
Let’s see if it makes sense to buy ORCL stock right now, given the recent rally, or if investors should wait for a pullback and buy it at a lower valuation.
What does Oracle do?
Oracle provides enterprise-facing informational technology products and services. These include enterprise applications and infrastructure offerings delivered through interoperable and dynamic IT deployment models. Its models include on-premise, cloud-based, and hybrid deployments that aim to improve the performance, security, reliability, and cost-effectiveness of clients.
For instance, the Oracle Autonomous Database leverages machine learning capabilities to automate traditional manual functions. Once the customer is on-board, they stand to benefit from Oracle’s wide array of offerings and deep domain expertise and enjoy the flexibility to purchase or renew other support solutions for their license and hardware deployments.
Oracle enters the AI space
Oracle stock has rallied in the last two weeks after it announced plans to develop generative AI (artificial intelligence) services for its global clientele. The company emphasized these AI solutions will help companies automate end-to-end business processes, improve decision-making capabilities and enhance customer experiences.
This new cloud-based service is developed in partnership with Cohere, a Canada-based startup that specializes in the LLM or large-language model space. Earlier this month, Cohere raised $270 million, valuing the company at $2.2 billion. Other tech giants that have invested in Cohere include Salesforce (CRM) and semi-conductor heavyweight Nvidia (NVDA).
According to Oracle, the AI-powered solution will be built on the OCI or Oracle Cloud Infrastructure, allowing it to offer an end-to-end platform for generative AI equipped with advanced security measures and a portfolio of cloud applications.
OCI’s executive vice president, Clay Magouyrk stated, “Our partnership with Cohere will enable our customers to easily embed generative AI into their business. Using Cohere’s foundational models, customers can securely incorporate their own data to train specific models, deploy them on best-in-class AI infrastructure through OCI, and experience the business benefits immediately in their applications.”
Cohere will reportedly train, develop and deploy its AI models on OCI. These models will also be integrated with Oracle’s portfolio of cloud applications allowing customers to quickly deploy generative AI and solve various business challenges.
What next for Oracle stock price and valuation?
Oracle is the undisputed global leader in the database software space. But in recent years, the shift towards cloud-based services negatively impacted demand for on-premise database offerings.
In order to join the cloud bandwagon, Oracle acquired NetSuite in 2016, allowing the former to gain traction in the public cloud infrastructure space. Last June, Oracle also acquired IT software company Cerner for $28 billion to further expand its cloud business while reducing dependency on its legacy on-premise software segment.
These acquisitions meant Oracle reported sales of $13.8 billion in fiscal Q4 of 2023 (ending in May), an increase of 17% year over year. Its adjusted earnings also rose 8% to $1.67 per share. In fiscal 2023, sales were up 18% at $50 billion, while earnings grew 4% to $5.12 per share. Oracle forecasts both revenue and earnings to grow by 8% year over year in fiscal 2024.
Due to its widening margins, Oracle’s free cash flow increased to $8.5 billion in fiscal 2023 from $5 billion in the year-ago period, allowing it to further enhance shareholder wealth via buybacks and dividends. In the last five years, Oracle has repurchased 32% of its outstanding shares and pays shareholders an annual dividend of $1.60 per share, indicating a yield of 1.33%.
How high can ORCL stock go?
Oracle continues to invest in organic growth and spent $8.7 billion in fiscal 2023 in capital expenditures. It expects CapEx to remain in a similar range in fiscal 2024. Analysts also remain optimistic about Oracle’s cloud infrastructure business as sales in this segment grew 76% to $1.4 billion in Q4.
Additionally, Oracle disclosed its generative AI customers have already signed contracts worth $2 billion to add cloud computing capacity, which suggests it is well poised to benefit from secular trends surrounding AI.
Priced at 23 times forward sales, ORCL stock is reasonably valued. Its market-thumping gains have surprised Wall Street participants in 2023, but the company’s investments in AI have driven investor optimism higher.
Out of the 25 analysts covering Oracle stock, 10 have a “strong buy” recommendation, 1 has a “moderate buy” recommendation, and 14 recommend a “hold”. The average price target for the stock is $121.84, which is marginally higher compared to its current trading price of $118.64.
I believe Oracle should continue to outpace the broader markets over the long term due to accelerating sales in its cloud segment, widening cash flows and profit margins, focus on acquisitions, healthy capex, and consistent buybacks.
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