Oracle shares rise as cloud revenue rises. Is it too late to buy the stock?

Once considered the next step in the cloud computing industry behind the big three industry players, Oracle (ORCL 2.67%) showed in its first-quarter fiscal results that it, too, is benefiting from the boom in artificial intelligence (AI) spending.

Let’s take a closer look at the company’s latest results and how it benefits from AI.

Cloud revenues are at the forefront

Oracle’s global fiscal first-quarter revenue rose 7 percent to $13.3 billion, but it was the 21 percent rise in cloud services revenue to $5.6 billion that excited investors. In the cloud segment, cloud infrastructure revenue rose 45% to $2.2 billion in the quarter ended Aug. 31, while cloud application revenue rose 10% to $3.5 billion. Meanwhile, Oracle Cloud Infrastructure (OCI) consumption revenue rose 56%, with the company saying demand outstripped capacity.

Meanwhile, Oracle has multi-cloud agreements in place with the big three large-scale cloud computing providers: Microsoft, AlphabetGoogle Cloud of and AmazonAmazon Web Services. With the recent signing of the AWS deal, Oracle said its customers will soon be able to use the database technology within each hyperscale company’s cloud offering.

Oracle’s 85 data centers in operation are all relatively new, and it currently has another 77 under construction. The company said it is looking into using modular nuclear reactors for power generation in a single project.

Elon Musk’s xAI used Oracle to train its Grok 2 Large Language Model (LLM). However, Musk built his own AI data center to train his next generation LLM Grok 3 because Oracle could not provide as many graphics processing units (GPUs) as xAI wanted.

On the database side, the company is moving to stand-alone databases, which it says will lead to cost savings and much higher margins. Autonomous databases use machine learning to automate routine database tasks without human intervention.

Remaining performance obligations (RPOs) rose 53% to $99 billion. Oracle said cloud RPO has increased by more than 80%. RPO is the total amount of money billed for contracts that have not yet been delivered. It’s an indication of future growth, although the length of contracts affects the number.

Earnings per share (EPS), meanwhile, rose 20% to $1.03.

Oracle expects fiscal second-quarter revenue to grow 8% to 10%, with cloud revenue growing in a range of 24% to 26%. Adjusted EPS is expected to increase between 8% and 12%. For the full year, the company projected double-digit revenue growth, with cloud revenue growth expected to be higher.

Longer term, the company believes that advances in AI models will lead to a strong investment cycle over the next five to 10 years as customers compete to stay at the forefront of AI.

Image source: Getty Images

Is it too late to buy the stock?

While things are looking good for Oracle, there are some notable things to watch for right now. One is that it is losing a pretty big customer in xAI, and the start-up should have signed a multi-year, $10 billion contract with Oracle before deciding to build its own data center.

Meanwhile, while its earnings were strong at $157 million, or $0.06 per share, the improvement came from an accounting change that increased the useful lives of servers and network equipment assets from five to six years. Otherwise, EPS growth would have been less than 13%. This change also reduced operating expenses by $197 million and improved gross margin, which would have otherwise declined due to the lower gross margin profile of its OCI consumption revenue.

From a valuation perspective, Oracle trades at a forward P/E of 25 based on current fiscal year analyst estimates. Unlike many big tech companies, Oracle also has a lot of debt. Net debt stood at about $73.6 billion at the end of the fiscal first quarter. Adjusting for debt, the enterprise value-to-earnings ratio would be closer to 29 times. Given that EPS growth was around 13% without the accounting change, I’d say the stock is a bit expensive.

ORCL PE Ratio data (before) by YCharts

Overall, I think Oracle is doing a lot of good things with its cloud division, but I wouldn’t watch the stock at these levels.