Oracle Has Spoken: AI Changes Everything

Key Points

• Oracle's Q1 results and guidance update affirm a ballooning outlook for AI and hyperscale demand.
• Analysts are lifting their targets and forecast a move above $400.
• The guidance is mostly booked; investors should expect it to continue growing.

Anyone surprised by Oracle’s NYSE: ORCL Q1 guidance update has not been paying attention to the news stream. Oracle’s forward-looking metrics have been accelerating for over a year as it leans into AI-enabled services and services for AI developers and applications.

The critical takeaway is that Oracle is no longer a niche player in tech, one of many database companies to choose from, but a vital link in AI infrastructure globally and a hyperscaler to be contended with. 

Among the details coming out of the Q1 release is the strength of demand from existing hyperscalers and the growth forecast they bring into the picture. Oracle Chairman and CTO Larry Ellison says revenue from the leading three hyperscalers, including Amazon, Google, and Microsoft, grew by more than 1,500% (yes, that is percentage points and not basis points) in Q1 and is expected to grow robustly over the next few years.

He forecasts that Oracle’s datacenter footprint will increase by more than 100% and drive substantial growth every quarter for years. 

Oracle’s Miss Overshadowed by Strong Guidance, Accelerating RPO

Oracle’s Q1 results came in below the analysts' forecasts, but two things offset the weakness. The first is that Oracle grew its revenue by 12.3% to nearly $15 billion, accelerating its growth sequentially and compared to the prior year as demand for cloud infrastructure spiked.

The second is that the guidance, which includes a 359% increase in the remaining performance obligation or RPO, was jaw-dropping. 

CEO Safra Catz says most of the guidance is based on existing, signed contracts with more multi-billion-dollar hyper-scale deals in the pipeline. The guidance is likely to be cautious in this scenario, and growth will exceed even management’s robust outlook.

Segmentally, Oracle’s strength was in the cloud. Q1 total cloud revenue grew by 28% on a 55% increase in infrastructure-as-a-service (IaaS) and an 11% increase in software-as-a-service (SaaS). Within the software segment, Cloud Fusion ERP grew by 17% and NetSuite by 16%. 

Margin news is another mixed bag, offset by the guidance. The Q1 results include a stronger-than-expected margin, offset by the top-line weakness, which left the adjusted EPS up 6% to $1.47 and a penny shy of MarketBeat’s consensus.

However, based on the guidance, profits and earnings are expected to improve significantly in the upcoming quarters, and the revenue leverage could be robust. 

As of early September, analysts forecast Oracle’s revenue growth to accelerate to approximately 35% by 2028, which is far too low. The company anticipates its cloud business will achieve triple-digit growth, sustain it for at least two years, and continue growing at a strong pace for the next three years. 

The cloud business already accounts for approximately 50% of the net, and achieving triple-digit growth is equivalent to 50% growth relative to the Q1 net.

Oracle’s Bullish Analysts Trends to Strengthen in Q3 and Q4

The initial analysts’ response to Oracle’s news was a moment of silence as they assimilated the jaw-dropping data. The second response was for several to issue price target increases, lifting their targets by 20% to 30%, creating a new high-end range forecasting a 70% increase from the pre-release closing high.

The 30% post-release gain has eaten up some of the potential, but plenty remains for investors. Analysts will likely continue lifting their targets as the quarter progresses, potentially increasing the high end and the consensus along with it. 

The technical setup was very bullish ahead of the release, with the market in rally mode and MACD converging in numerous time frames.

The 30% or $75 increase is only 75% of the move indicated, suggesting this stock could advance to the $340 region before hitting the first significant resistance point.