Earnings Report Preview | Cloud giant Oracle's performance is coming! Can the "AI faith" create another wave?

Zhitong App has learned that the global tech giant Oracle, renowned for its cloud computing services and database software, will release its 2024 fiscal third-quarter earnings report as of the end of February after the U.S. stock market closes on March 11 (early morning on March 12 Beijing time). According to market expectations compiled by the investment research platform FactSet, overall, Wall Street analysts anticipate a 13% year-on-year increase in Oracle's adjusted earnings per share for Q3 to $1.38, and a 7% year-on-year growth in total revenue to $13.3 billion.

In terms of details, Wall Street analysts predict that Oracle's cloud services, including IaaS and SaaS, as well as its licensing support business, will see the strongest revenue growth, particularly driven by subscription-based software services under Oracle. It is worth noting that the cloud revenue of the two global cloud giants, Amazon AWS and Microsoft Azure, has been impressive. According to FactSet's expectations, revenue from such businesses is expected to grow by 11.4% to reach $9.9 billion. Additionally, Wall Street analysts also forecast a 14% increase in Oracle's net profit for the third quarter to $3.87 billion.

Benefiting from the AI trend, Oracle's stock price has surged by 40% in the past year, currently making a push towards new highs. Since 2024, the increase has been as high as 7%, almost in line with the broader U.S. stock market - the S&P 500 index. With the global tech companies intensifying their efforts in deploying generative AI technologies like ChatGPT, Oracle stands out as one of the biggest winners in this trend, with its global customer base for cloud computing infrastructure (IaaS) and cloud computing application software growing significantly.

However, Oracle's stock price has been in a state of "panic" recently, but its financial report for the third quarter provides this tech giant with another significant opportunity to prove its potential as a winner in the field of artificial intelligence. The current stock price of Oracle has dropped by 9% from its six-month high of nearly $130 in September last year. The stock saw a continuous rise in the first half of 2023, but has been in a sideways trend since September last year due to two consecutive quarters of underperforming results, closing at $112.42 at the end of Friday's U.S. stock market.

Analysts have been continuously raising their performance and stock price outlook for this 46-year-old tech company, mainly based on the enormous growth potential of its cloud computing services as customers shift towards AI products. However, two disappointing performance reports have weighed down Oracle's stock price since then. NVIDIA (NVDA.US), the "strongest shovel seller" in the field of AI, has recently single-handedly revitalized the "AI faith" of global tech stock investors, potentially causing a significant wave in the global stock market. Since 2024, the impact of "AI faith" on global stock markets, including the US stock market, has surpassed the effects of the expected rate cuts by the Federal Reserve. Global tech stock investors are eagerly awaiting Oracle's performance, hoping that the cloud giant's earnings report will continue to fuel the strong bullish sentiment that has recently driven the rise in US stocks, and they are also looking to Oracle's performance to reignite the bullish wave of "AI faith" in the stock market.

Oracle, a Veteran Tech Giant and One of the Big Winners in the AI Craze

Why has the veteran tech giant Oracle gained favor among a large number of investors in the secondary market? Mainly because the company has shifted its entire business to the cloud computing field in recent years, and the AI craze has helped boost its revenue, with the market increasingly optimistic about the company's performance prospects in the AI era, thereby continuously driving up the valuation of this long-standing tech giant.

Oracle, Google Cloud under Google, AWS under Amazon, and Microsoft Azure are all major global cloud computing service providers, offering one-stop cloud service deployment from IaaS to SaaS. Their users can choose to deploy applications on the provided cloud infrastructure or use managed cloud platforms to develop and run applications such as generative AI. These companies have established extensive data center networks globally, allowing users to choose the nearest data center to host and process their data and applications.

The prospects for Oracle's AI-related services are very broad. In the third quarter (Oracle's first quarter of the 2024 fiscal year), the company was selected by the well-known AI startup MosaicML as the preferred cloud infrastructure (IaaS) partner for accelerating AI model training. In addition, as the demand for cloud services and AI services from customer groups continues to accelerate, Oracle has announced free training and certification programs.

The Oracle management team continues to push forward the strategic shift of Oracle's flagship products/services (such as Fusion, NetSuite, and MySQL) to the cloud platform, helping this veteran tech company achieve performance expansion in recent years. Looking at the revenue growth in the past year, Oracle's revenue scale has regained an upward trend recently, largely indicating that the software manufacturer's cloud computing-related services are benefiting from the growing demand for cloud computing services brought about by the AI craze in global enterprise deployments. The renowned research firm Wolfe Research once wrote in a report that the vigorous development of generative AI, which requires powerful computing capabilities, may boost strong demand from global enterprises for Oracle's cloud computing services. Investors are closely watching the revenue growth and capital expenditure guidance of Oracle OCI.

The performance growth of Oracle's cloud computing infrastructure business (part of the IaaS field) will be closely monitored. Oracle's Oracle Cloud Infrastructure business (OCI) hosts the vast majority of large databases based on generative artificial intelligence for Oracle's customers. Oracle's founder and chairman, Larry Ellison, stated in last December's quarterly earnings report that artificial intelligence is bringing a "gold rush" to cloud computing services. This could be good news for Oracle's OCI business, as analysts generally believe that AI-driven cloud service spending is crucial for the long-term growth of OCI and Oracle's overall performance.

However, Oracle's stock price experienced significant declines after the performance reports released in September and December last year. The main issue is that the revenue growth rate of Oracle's cloud infrastructure business (OCI) has slowed for two consecutive quarters. Although the revenue data brought by Oracle's cloud infrastructure business surged by 52% year-on-year to $1.6 billion in the quarter ending in November, the revenue growth rates in August and May were as high as 66% and 76%, respectively. The quarter ending in November also showed that Oracle's cloud service revenue, covering from IaaS to SaaS, grew by 25% year-on-year to $4.775 billion, which is lower than the 30% growth rate in the previous quarter, indicating a continuous slowdown in Oracle's cloud computing service revenue growth for two consecutive quarters.

Overall, the growth rate of Oracle OCI is still faster than its competitors in the cloud service field, such as Amazon's AWS, Microsoft, and Google under Alphabet. However, Oracle is catching up. According to a recent report by Synergy Research Group in February, Oracle's overall market share in the cloud service market was less than 5% by the fourth quarter of 2023. Synergy's survey data shows that in the last few months of 2023, Amazon accounted for about 31% of the overall cloud service market sales, while Microsoft and Google accounted for approximately 24% and 11%, respectively.

Barclays analyst Raimo Lenschow recently wrote in a client report, "All eyes will be on this quarter's AI capital expenditure for Oracle's ambitious plans in the field of artificial intelligence." In December last year, the company stated that the demand for cloud services related to artificial intelligence was extremely strong. However, one of the major challenges Oracle faces is expanding the underlying hardware and software infrastructure to meet customer demands for supporting its cloud services. However, as described by Oracle, the expansion is facing some challenges. This includes acquiring a sufficient number of high-performance computing chips, such as the NVIDIA H100 AI chip.

Additionally, Oracle's capital expenditure for the first six months of this fiscal year was $2.4 billion, lower than analysts' expectations. But the company's CEO, Safra Catz, reiterated in December last year that the company's capital expenditure for the fiscal year ending in May is expected to be $8 billion, indicating the company's intention to increase spending.

"Capital expenditure may be a more noteworthy figure, as we need to see a meaningful scale of expansion to support the growth of Oracle's cloud services/artificial intelligence infrastructure services in the coming quarters," wrote Barclays analyst Lawrence. The analyst rates Oracle as "Hold," with a target price of up to $140 in the next 12 months.

Ahead of Oracle's official announcement of the performance for the third quarter of the 2024 fiscal year, analysts on Wall Street are generally optimistic. Evercore ISI Group set Oracle's 12-month target price at $130, maintaining an "Outperform" rating; Wolfe Research also set Oracle's target price at $130, maintaining an "Outperform" rating.