Oracle (NYSE: ORCL) has been one of the quiet winners of the enterprise software world for decades. While Nvidia, Microsoft, Meta, and others hog the AI headlines, Oracle is quietly doing its own thing. This thing is, in many ways, less glamorous and more mundane. Oracle has:
- Stable and sticky cash flows from its existing enterprise software business.
- Deep and longstanding relationships with many Fortune 1000 and Global 2000 customers.
- Fast-growing cloud infrastructure.
- A database franchise that still powers a majority of global business processes.
The big question for investors today is simple: Is Oracle worth buying?
This post aims to break down the business and valuation in a practical way so you can decide for yourself if it belongs in your long-term portfolio.
Oracle’s Current Position: Strong, Sticky, and Ubiquitous
Oracle has always been one of the most “sticky” enterprise software providers in the world. This is for a few reasons.
Oracle’s database products, middleware, and application suites are deeply embedded in the guts of the global economy. We are talking core systems for:
- Banks and financial institutions.
- Global manufacturers and service firms.
- Healthcare and life sciences networks.
- Government and public sector.
Oracle databases and applications are ubiquitous in global enterprise IT.
Oracle has also managed to remain relevant in the hybrid cloud era. The company has open-sourced a core of its infrastructure and built a comprehensive cloud stack, including tools for managing legacy data. Newer databases run on Oracle’s own OCI cloud hardware and bare metal, or on customer-premises hardware or public clouds through a hybrid cloud software bridge.
Oracle’s strength is that once companies build deeply into its software stack, it is very costly and risky to move mission-critical systems elsewhere. Database migrations, rewrites, data structure changes, and the cost of Oracle’s competitors learning a new system are all significant barriers to vendor switching.
It is one of the most “sticky” SaaS and software companies.
The key here is that even though Oracle isn’t the market leader in cloud infrastructure, it has hundreds of thousands of clients worldwide who generate highly sticky recurring revenue from its cloud and database businesses.
Oracle has found a significant use case for AI
As we will discuss in more depth later, Oracle also has its share of industry-specific workloads where AI use cases are significant. This includes AI-enablement and automation in:
- Manufacturing and industrial operations.
- Banking and financial services.
- Supply chain and logistics.
These remain some of the heaviest lifting business process use cases for AI and business software in general.
Oracle’s cloud business: late but growing fast
Oracle is the world’s fifth-largest public cloud infrastructure provider, trailing AWS, Microsoft, Google Cloud, and Alibaba. This has been a point of criticism for Oracle, and for years Oracle was left for dead in the cloud industry by many analysts.
Oracle began its cloud infrastructure transformation years later than the other big three and the market was (rightly) skeptical. Oracle was a laggard, and even now the cloud business remains small compared to AWS and Azure.
But the market perception is wrong. Oracle has been growing quickly, faster than the big three, due to a few key factors.
- Oracle has developed a low-cost, high-performance cloud hardware stack. These are using Nvidia GPUs and Ampere chips, making it very attractive for AI workloads.
- Oracle has launched an aggressive multi-cloud strategy, including with Microsoft Azure, which allows network bridging across clouds and shared services.
- Oracle has found heavy adoption from its enterprise clients, who like the ability to keep its databases, middleware, and cloud stack integrated.
Oracle may not overtake AWS or Azure in size and scale. I would not be surprised if it does not get that large. OCI still represents only about 10% of Oracle’s total revenue.
But that is not the point. Oracle does not need to overtake AWS and Azure in size or scale. Oracle Cloud has global reach, and for Oracle, even a relatively small revenue stream still has a meaningful impact on top-line growth and valuation.
Oracle as an AI play: under the radar, but powerful
Oracle is not a typical AI stock in that it will not win share from Google or Microsoft in generative AI or foundation models. At least not in the near term. But this may be a strength.
Artificial intelligence ultimately depends on data, and data is at the center of the Oracle business. Let’s look at some of the key data growth drivers Oracle is in a good position to benefit from.
AI requires easy access to enterprise data
Oracle’s Autonomous Database and related analytics services have become go-to tools for cleaning, normalizing, and managing data used for AI automation and AI-powered decision systems. Oracle also provides AI-enriched data ingestion, transformation, and integration services, which again are used to unlock enterprise data for business apps.
Cloud GPU demand
Oracle is one of the world’s largest buyers of Nvidia GPUs, making it a key provider of AI compute power to its enterprise cloud customers.
Industry-specific AI tools
Oracle is also quietly developing a series of industry-specific AI modules in verticals like healthcare, banking, supply chain, and retail built inside Fusion and NetSuite. There are natural AI use cases inside these workloads, and Oracle is picking up share over its competitors here, I believe.
The bottom line for me is that Oracle is not in the AI consumer spotlight. You will not see Oracle featured much in consumer AI apps, and that is ok. Oracle is set to become a key backbone for enterprise AI and ML development.
Oracle’s Financial Profile: Sticky Revenue and Strong Cash Flow
Oracle has one of the best financial profiles of any enterprise software company in existence today.
- Oracle’s revenue streams are highly stable. Oracle gets the vast majority of its revenue from software licenses and maintenance contracts, perpetual database licenses, long-term subscriptions, and multi-year cloud contracts.
- Oracle has very strong free cash flow generation. This is why Oracle can support dividends, buybacks, and a hefty acquisition budget from that cash flow, allowing Oracle to grow, innovate, and acquire without worrying about selling new shares.
- Oracle has extremely high profit margins. The company is known for a very tight expense structure and is one of the most profitable software companies in the world.
Oracle’s cash flows mean stability when the stock is volatile
Oracle has roughly $39B in long-term debt on its books. Debt was added when Oracle acquired Cerner for $28.3 billion last year, a strategic but expensive move that significantly strengthened Oracle’s position in healthcare, a key data-driven AI vertical.
Oracle is on track to become cloud positive in fiscal 2024, as the new Cerner cloud business ramps and is factored into earnings.
Oracle’s annual net debt to EBITDA ratio is 0.55, which is higher than the median for large-cap software firms. Cash flow is strong and Oracle should be able to service and delever over time, especially if the cloud business can grow more quickly than expected.
Investing in Oracle: What to Watch Out For
Oracle is not a risk-free stock, and investors should be aware of a few significant challenges and risks.
Competitive cloud pressures
AWS, Azure, and Google Cloud are extremely competitive. Oracle has to be smart with its go-to-market, partnerships, and pricing, and it will remain a smaller player for the foreseeable future.
Slow-growing customers
Oracle has very sticky revenue, but customers are large incumbents and government customers. Growth rates in enterprise software are always low single digits.
Acquisition integration
Oracle has a history of strong integration with its acquisitions, but even a successful acquisition like Cerner has challenges and execution risk.
Rotation risk
Oracle has been a big beneficiary of the enterprise tech rotation over the past six months. If market conditions change and investors rotate out of defensive large-caps, this may put pressure on short-term price action.
Should You Buy Oracle Stock Today?
Oracle is increasingly attractive for the long-term, fundamentals-focused investor. Oracle is not a moonshot stock or a fast-growing AI breakout. Instead, it is an enterprise software behemoth that is continuing to strengthen its core software business while also capitalizing on the biggest tech shift of this decade.
Here’s why investors are paying attention:
- Oracle cloud business scaling faster than expected.
- Growing need for AI infrastructure.
- Oracle databases still run a majority of the world’s businesses.
- Cash flow is adding stability to a volatile market.
- Expanding partnerships with Nvidia and Microsoft create new growth opportunities.
Oracle is a potentially good choice for investors looking for a safe large-cap tech stock with AI exposure, predictable revenue, and room to grow from its cloud business. For those who prefer high-growth, high-volatility names or speculative AI and data stocks, Oracle will feel conservative.
An Investor’s Take
Oracle is stronger today, more relevant today, and more forward-looking today than it has been in many years. It is executing well in cloud, finding solid momentum in AI infrastructure, and leveraging its massive enterprise customer base.
Oracle is not likely to 10x from here. But Oracle has a chance to compound steadily for the next decade.
The best investments are sometimes the boring ones.
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