Oracle (NASDAQ:ORCL) is clearly benefiting tremendously from the proliferation of artificial intelligence and the continued transition of many companies to the cloud.
Many on the Street are very pleased with the company. While the firm reported exceptionally strong results for its quarter that ended in May, the valuation of Oracle stock is quite attractive. In light of all of these points, I recommend that investors buy the company’s shares.
A Big Beneficiary of AI and Cloud Transitions
In a deal unveiled in June, OpenAI, the owner of the popular AI chatbot ChatGPT, chose to utilize Oracle’s cloud infrastructure to run its deep learning and AI workloads. In light of OpenAI’s tremendous prominence in the tech space, I expect many other sizeable firms in the sector to follow the company’s lead by choosing Oracle to handle their deep learning and AI tasks.
And Oracle is already a huge player when it comes to providing cloud services for the providers of AI tools. In its quarter that ended in May, CEO Safra Catz told analysts the firm signed 30 AI-oriented deals worth more than $12 billion.
Meanwhile, Oracle continues to benefit from firms’ ongoing transition to the cloud in general and their increased utilization of cloud applications in particular. Catz noted that “a very large enterprise tech company” had agreed in Q4 to pay Oracle $600 million to utilize its cloud applications. And the firm’s total cloud product revenue jumped 23% last quarter versus the same period a year earlier to $4.7 billion. On the cloud services and support side, its sales climbed 10% year-over-year to $10.2 billion.
The Street Is Largely Bullish on Oracle Stock
Japanese bank Mizuho last month identified Oracle as one of its top picks. Mizuho believes that investors are undervaluing the company’s cloud infrastructure business. And in June after Oracle’s Q4 results, Keybanc raised its price target on the shares to $165 from $160 and kept an “overweight” rating on the name. The bank believes that OpenAI is a “headliner” that improves Oracle’s prospects going forward.
Investment bank Jefferies wrote last month that the firm “continues to see exceedingly strong demand…with its pipeline growing faster than bookings and revenue.” Finally, another investment bank, Piper Sandler, predicted that Oracle would benefit from increasing spending on infrastructure as a result of the AI boom. The bank named Oracle stock as one of its three top ideas in enterprise software. Its two other picks in the space were Microsoft (NASDAQ:MSFT) and monday.com (NASDAQ:MNDY).
Meanwhile, Oracle stock has a Relative Strength rating of 85, showing that the company has outperformed most stocks over the last year. Also importantly, institutional investors bought 91.47 million shares of the name in calendar Q1 while only selling 71.8 million shares.
Strong Overall Q4 Results and Attractive Valuation
Oracle’s backlog, or remaining performance obligations as the company calls it, soared 44% in Q4 versus the same period a year earlier to $98 billion. Moreover, the company’s operating income, excluding currency fluctuations, jumped 9% YOY, to $6.7 billion.
On the valuation front, the company’s forward price-to-earnings ratio is just 22 times, while its trailing price-to-operating cash flow ratio is only 20 times. Meanwhile, analysts expect the company’s EPS to jump to $7.19 next year
Given Oracle’s strong growth and its high leverage to the AI and cloud-computing boom, I believe the current valuation of Oracle stock is quite attractive.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article 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.
