Before investing in Oracle (NYSE:ORCL), it’s essential to analyze varying viewpoints to soundly decide on the best action. Oracle is one of the major companies in the cloud computing and software for enterprise markets.
The financial performance of Oracle has been good with strong revenues and earnings. It has also paid great attention to the cloud services and enterprise software segments as its main business strategy. And, price targets set by the analysts paint a positive picture for Oracle stock. Shares may possibly be rising by 5% to 6% within the next 12 months.
However, Oracle is a direct cloud rival to Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
Investors should ask themselves this question. Is Oracle a value stock, or can one wait for a better entry?
Personally, I believe that it’s a hold. But, I will further explore alternative points of view as its valuation is not so straightforward.
Why ORCL Is a Hold
Oracle’s recent financial performance is strong, with total revenues up 3% to $14.3 billion last quarter. Yet, I’m concerned about some underlying issues.
Within a highly competitive market, Oracle’s 20% growth in cloud revenue is impressive. But it still has Amazon Web Service (AWS), Microsoft Azure and Google Cloud ahead of it. It concerns me most about its failed $10 billion deal with xAI, which makes me question its ability to land and retain major clients in this space.
In addition, many prominent insiders are selling shares over the last 12 months. This makes me worry if there are some issues that we are not aware of about the company.
Furthermore, Oracle stock’s valuation gives me some concern. At a P/E of about 36x earnings, one has to suspect that a lot of positive expectations are already being reflected in the stock price, which could imply limited room for growth. I’m not convinced it justifies this premium yet.
Cloud and AI Transition Turbulence
Several potential issues are at hand along with its many positives. Thus, based on the analysis of the company’s position, one could recommend selling Oracle stock.
While the most recent artificial intelligence (AI) deals made by Oracle are substantial, I believe in an inevitable general stagnation of the AI industry. And that may subsequently affect the growth of Oracle.
The AI revolution is booming. However, it’s crucial to note that we are working from the lowest baseline possible since it is brand new technology. Incremental growth then looks like giant leaps forward, and its growth is expected to slow down exponentially as time progresses. If CPU and GPU development is reflective of the trajectory of the AI market, due to the failure of Moore’s law, an inflection point will be reached. Then, diminishing returns will start to kick in, making each iteration and improvement of AI models comparatively less impressive and powerful.
Of course, this is more a broader criticism of the AI industry as a whole. But I think if investors were banking on Oracle to be a “picks and shovels” stock to enable pipedreams like artificial general intelligence (AGI) in the near future, then they might be sorely disappointed with our slow, realistic progress.
Concepts like AGI are either going to come within reach during the next few years or not at all. Yet, no evidence suggests we are even close to it.
Cloud Dominance and AI Synergy
Despite the market’s inability to hold rational expectations for its potential, Oracle’s current focus on AI and cloud infrastructure are prime reasons to invest.
Some of the strategic partnerships that the company has made, especially with OpenAI and Microsoft, make it a tactical play in the AI revolution. While the AGI is currently far out of reach, Oracle is forming part of the backbone that holds components of this technology together. Certainly, we haven’t seen the peak of this technology.
The core business gives a steady cash flow, and the cloud and AI business lines provide much room for growth.
However, I still think that Oracle stock is a hold. The cloud and AI industries are now one and the same. But, it is too early to judge AI’s future impact on society, which may lead to some disillusionment considering that at least some of those hopes (and dreams) are already reflected in its present valuation.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
