Oracle: Undervalued For Its AI Growth Potential (NYSE:ORCL)

Typical tech companies tend to have one major growth spurt, and then see slowing growth throughout the remainder of their existences as they capture more and more of their addressable market. The AI boom, however, is turning that general rule on its head, as many legacy technology companies are now experiencing a secondary surge from a wave of AI deals.

Though not as flashy as some of the other names in the market, Oracle (NYSE:ORCL) has quietly been a big beneficiary of the AI revolution. Year to date, the stock is indeed up ~37%: but as the company looks ahead to its fiscal FY25 (the year ending for Oracle in May 2025), the company is expecting revenue growth to materially accelerate driven by these watershed deals.

The bull case for Oracle looks bright with AI

I last wrote a bullish article on Oracle in April when the stock was trading around $120. Since then, Oracle has rallied a further ~20%, especially after the company announced strong results in June and hinted at accelerating growth in the year ahead. Accordingly, I’m reiterating my buy rating on this stock and have added to my position as Oracle has risen.

The key driver behind recent success here, of course, are AI deals. But this isn’t just a buzz word for Oracle: the company has indeed signed several landmark deals in its IaaS (infrastructure as a service) business, proving that Oracle’s cloud services aren’t just a discard laggard behind Amazon AWS (AMZN), Microsoft Azure (MSFT) and Google Cloud Platform (GOOG).

In early June, Oracle announced that it signed an agreement with OpenAI (despite OpenAI’s close relationship with Microsoft and its existing usage of Microsoft Azure) to provide additional cloud capacity. The company noted that this was one of 30 major AI deals that Oracle signed in the most recent quarter.

All of this bodes well for the company’s planned growth acceleration in FY25. Beyond the recent tailwinds from AI deals, here is a refresher as to my long-term bull case for Oracle:

• Oracle has among the broadest product portfolios of any company in the software industry, enabling rich cross-selling opportunities. Oracle now has a full suite of front-end applications covering functions such as supply chain, finance, HR, sales – everything under the sun. The company has also retained its traditional strength in backend infrastructure, with products like the Oracle Autonomous Database.
• Leader in enterprise tech sales- Oracle essentially invented the sales playbook in Silicon Valley. Its late co-CEO, Mark Hurd, is often credited with institutionalizing the position of a “business development representative”, the cold-calling army that now represents among the most common entry-level positions in the industry. Oracle has among the best-oiled sales processes in enterprise technology, and continues to leverage that playbook to grow its business.
• Key vertical opportunity in healthcare/Cerner- Medical records have long been one of the bastions that tech has so far failed to disrupt. Larry Ellison, Oracle’s founder and now Chairman/CTO, is personally throwing his weight behind adapting the company’s products (bolstered by a massive Cerner acquisition in 2022) and adding in AI functionalities.
• Rich margin profile- Oracle has long boasted 80%+ gross margins and ~30% operating margins, the result of a massive software install base that drives recurring revenue for little incremental effort.

Q4 was strong, but FY25 looks even brighter

Oracle has been on an upward tear since June, and not just in sympathy with the broader markets, but because the company posted strong fiscal Q4 (May quarter) results alongside very bullish remarks for the upcoming year ahead. Take a look at the results below:

Revenue grew 3% y/y to $14.29 billion, but recall that Oracle is still in the process of unwinding its on-prem license business (which provides more upfront revenue) and shifting more of its customers to cloud-based subscription products (more stable recurring revenue over time). Its cloud metrics were much stronger:

• Cloud applications (SaaS), typically thought of as the “top” of the software stack with apps designed for end users, grew 10% y/y to $3.3 billion on a constant-currency basis
• Cloud infrastructure and platform (IaaS and PaaS) revenue, meanwhile, which is Oracle’s historical bread and butter from its inception as a database company, grew 20% y/y to $5.3 billion on a constant-currency basis

The latter, in particular, was driven by 42% y/y growth in IaaS deals: a result of the AI deals that have spurred Oracle’s second growth spurt. The 30 AI deals that the company signed in Q1, in management’s view, is only the beginning of a long string of new deals that are expected to drive growth acceleration in FY25.

In the press release accompanying the company’s Q4 results, CEO Safra Catz wrote as follows:

“In Q3 and Q4, Oracle signed the largest sales contracts in our history—driven by enormous demand for training AI large language models in the Oracle Cloud. These record level sales drove RPO up 44% to $98 billion. Throughout fiscal year 2025, I expect continued strong AI demand to push Oracle sales and RPO even higher—and result in double-digit revenue growth this fiscal year. I also expect that each successive quarter should grow faster than the previous quarter—as OCI capacity begins to catch up with demand. In Q4 alone, Oracle signed over 30 AI sales contracts totaling more than $12.5 billion—including one with Open AI to train ChatGPT in the Oracle Cloud.”

For a company that is now 47 years old, the expected substantial acceleration in revenue growth: from just 3% y/y this quarter to double-digits in FY25, as well as the expectation that every quarter will see sequential acceleration in FY25, is truly rare.

Valuation still below peers

And yet despite the expected acceleration and onset of AI dealmaking, Oracle still trades at a quite attractive valuation relative to many of its large-cap software and Internet peers that are also enjoying similar AI tailwinds.

Oracle’s ~23x P/E ratio sits nearly two turns below its next-nearest peer (Alphabet), while also trading at a ~30% valuation discount to AI leader Microsoft. With this in mind, investors should take comfort in being able to express a long position on AI tailwinds without paying a hefty valuation premium.

Key takeaways

There’s a lot to like about Oracle, including continued strong cloud growth rates, tremendous acceleration potential from AI deals, and a still-modest valuation that trails peers. Stay long here and keep riding the upward wave.