Oracle’s (NYSE: ORCL) launch of Gen-2 Cloud services was slow, but the focus on quality over quantity is paying off. The company’s Q3 results and outlook confirm the 2nd wave of AI is here. The wave where all those chips NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) produce are built into next-gen cloud infrastructure, paving the way for widespread technology adoption. The primary takeaway from the report is that demand for AI infrastructure exceeds supply, Oracle is ramping supply as quickly as it can, and business momentum is building, driving shareholder value.
"We expect to continue receiving large contracts reserving cloud infrastructure capacity because the demand for our Gen2 AI infrastructure substantially exceeds supply—despite the fact we are opening new and expanding existing cloud data centers very, very rapidly,” said CEO Safra Catz.
Oracle Speaks: The Market Likes What It Heard
Oracle’s Q3 results were mixed with revenue as expected, but that is the weakest detail of the report. The $13.28 billion is as expected but up 7.% YOY on strength in the cloud business, the company’s growth segment. Total Cloud is up 25%, which is led by a 49% increase in IaaS or infrastructure-as-a-service. SaaS revenue is up a smaller 14%, with Fusion ERP up 18% and NetSuite Cloud up 21%.
Among the catalysts in the report is the RPO or remaining performance obligation. RPO is a measure of contracted but not yet delivered business; it is up 29% on acquiring large, new customers. RPO reached a record $80 billion; nearly half is expected to be recognized as revenue in the next four quarters. That's a tremendous surge in new infrastructure capability and improvement to the revenue base.
Margin news is another catalyst for the market. The company widened its operating margin on cost controls, revenue leverage and mix, leaving the adjusted operating income up 12%, the net income up 18%, and adjusted earnings up 16%. Adjusted earnings are $0.03 better than expected, and margin strength is likely in Q4 and calendar 2024.
Oracle doesn’t give guidance but shows momentum that will carry through for at least the next few quarters. Execs expect to see the Gen2 Cloud business sustain hyper-growth in the “foreseeable future” and may downplay the business. Among the drivers are new services to health-related firms that include voice-assisted AI-powered charting and documents. A partnership with NVIDIA is also in play. The details are unknown and will be announced in mid-March, but likely include a collaborative effort to build new AI infrastructure and services.
Analysts Predict Higher Prices for Oracle Stock
The response from analysts to Oracle’s Q3 results is positive. Marketbeat.com tracks at least a dozen revisions that include several upgrades to Buy or Outperform equivalents and numerous price target increases. The price target increases have the stock trading well above the pre-release consensus with the potential for at least another 20% upside, including the post-release pop.
The new high target is $165, or about 30% of the upside, and higher targets are likely as the year progresses. Details cited in the reports include booking strength, RPO, the cloud and AI. Analysts Dan Ives of Wedbush reaffirmed that Oracle is central to the firm's AI investment thesis.
The Technical Outlook: Oracle Surges to New High, Rally On!
The price action in Oracle lagged the analysts' consensus but is quickly catching up to it. The post-release pop has the market up by 13% to 15% to align with the pre-release consensus, and it may continue to increase once the session is opened because of analysts' updates.
Based on the technical projection alone, assuming the market sustains support at the new highs, this stock could rally as much as 30% over the next two quarters. Because that projection aligns with the post-release analysts' action, it is likely reached sooner rather than later. The risk is profit-taking. Profit-taking may cap gains at the current level. In that scenario, the stock may retreat to the $120 level or lower before continuing to set new highs.
