Oracle’s (NYSE: ORCL) CQ1 2025 price correction is an opportunity for investors because the market is resetting its outlook and not reversing. The market reset is due to the timing of AI’s tremendous impact on Oracle.
Unlike NVIDIA (NASDAQ: NVDA), which claims most of the AI glory to date, Oracle’s success lies in the long-term application of AI.
Details from the Q3 report affirm the company’s emergence as a critical player in AI infrastructure, a game-changing event for business and technology investors. Oracle is still a small player in the data center world but a budding hyperscaler on track to produce the fastest data center growth of them all.
1. Oracle’s Tepid Q3 Results Reveal Increased AI Momentum
Oracle’s Q3 results were tepid relative to MarketBeat’s reported consensus but are still solid, provide value to investors, and internal data reveal Oracle’s increasingly critical position in the AI world. The revenue of $14.13 billion fell short by 180 basis points due to weakness in legacy businesses, but the weakness is offset by the 6.4% annual growth and strength in the segments that count.
Services and Systems Support, the bulk of the business, grew by 10%, while Cloud License and On-Premise contracted by 10%. Within the services segment, total cloud grew by 23%, with strength in both sub-segments. SaaS, the weaker segment, grew by 9% on double-digit gains in its core offerings, while IaaS grew by 49%.
2. Oracle Guides for Sustained Business Acceleration
The business highlights from Q3 and long-term guidance point to accelerating growth and a potentially cautious outlook. The highlights include $48 billion in new contracts, a 92% sequential increase in business from the major hyperscalers, a 62% increase in the backlog to $130 billion, and a forecast for revenue to growth to accelerate to 15% in F2026 and then 20% in F2027.
The guidance may be cautious due to the increased demand from hyperscalers, including Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), and Microsoft (NASDAQ: MSFT), deals with significant AI players, including OpenAI and Meta Platforms (NASDAQ: META), and the doubling of capacity.
3. Oracle’s New Product Makes It the Only Place to Train AI Models
Oracle unveiled an innovative new product it calls the Oracle AI Data Platform. It directly links leading AI models, including ChapGPT, Grok, and LLAM, to Oracle’s 23ai database. The service facilitates the training of AI models using private or public data with advanced vectorizing tools.
Vector-based search is vital to AI because it allows machines to analyze complex data sets and order the information numerically in vectors. Vectorizing facilitates similarity searches and, ultimately, comprehension, which is the key to unlocking AI's full potential.
4. Oracle’s AI Empire Generates Robust Cash Flow
[content-module:MarketRank|NYSE:ORCL]Oracle is spending plenty on AI but insufficient to negatively impact the balance sheet, given the earnings leverage AI provides.
Balance sheet highlights from Q3 include increased cash, current, and total assets partially offset by increased liability.
The net result is a near-doubling of shareholder equity to $17.2 billion and a drastic reduction in debt leverage.
Leverage is still elevated at 5x, but it is manageable and a significant improvement from the 8x reported at the start of the fiscal year.
The bottom line is that cash flow and dividends are safe, including the 25% increase authorized by the board.
The new payment is worth $2.00 annually, with a yield of about 1.3%. The stock is at $145 and still only 35% of the earnings forecast.
5. Oracle’s Analyst and Institutional Support Is Strong
Oracle’s analysts reset their price targets following the FQ3 release but not their sentiment ratings. The stock is pegged at a Moderate Buy with a bullish bias and comes with a forecast for a 20% upside. The price target reductions are a concern but do little to alter the outlook, with most indicating a consensus or higher price point by year’s end.
Regarding the institutions, their buying activity ramped to a multiyear high in Q1. Buying activity outpacing selling by roughly $4.5 billion or about 1% of the stock, providing strong support for the market.
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