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Oracle is on Track for Its Best Year Since 1999. How Did the Meteoric Rise Begin?

December 1, 2024
minute read

Bets on artificial intelligence (AI) and the development of large language models have propelled Oracle to a standout year, marking its best performance in a quarter century. The company’s stock has surged 75% in 2024, positioning it for its second-best year ever and its strongest showing since 1999, when shares nearly quadrupled in value.

This impressive rally reflects growing investor confidence in prolonged AI-related spending, fueled by advancements that began two years ago with the debut of ChatGPT.

While Nvidia has been the face of the AI-driven market surge, companies like Oracle are now coming into focus as investors broaden their search for secondary beneficiaries of AI infrastructure. Nvidia’s dominance in this space, alongside key players such as AMD, Alphabet, and Microsoft, has powered significant market gains in recent years.

However, 2024 has seen a shift in attention toward companies that provide the foundational technology to support AI applications, bringing Oracle back into the spotlight.

Dan Flax, a senior research analyst at Neuberger Berman, attributes Oracle’s resurgence to its strategic pivot to cloud computing, which has enhanced its value proposition for customers. “The company is demonstrating durable growth, and that’s a critical factor for its strong performance,” Flax said.

Founded in 1977, Oracle grew into one of the largest software companies globally, shaping the enterprise computing industry. This success has contributed to founder Larry Ellison’s immense wealth, making him the world’s second-richest person after Elon Musk, with a net worth of $227 billion, according to the Forbes Real-Time Billionaires list.

However, over the past decade, Oracle faced challenges as it lagged behind rivals like Salesforce and cloud service hyperscalers in the infrastructure-as-a-service market. The company also grappled with criticism for dismissing cloud computing’s early potential while incurring significant expenses on acquisitions.

Despite these setbacks, Oracle has found renewed momentum by prioritizing its cloud infrastructure business. According to CFRA Research analyst Angelo Zino, this strategic refocus has positioned the company to capitalize on AI’s growing demands. “We’re entering a world where enterprises increasingly seek cloud space for AI workloads,” Zino noted. “Oracle is uniquely positioned to tap into this growth opportunity.”

Robert Pavlik of Dakota Wealth Management credits Oracle’s expertise in data management as a key factor in its successful pivot to AI. Meanwhile, Larry Ellison’s leadership has been instrumental in revitalizing the company. Kim Forrest, chief investment officer at Bokeh Capital Partners, highlighted Ellison’s marketing prowess, describing his ability to adapt the company’s focus to emerging trends. “Larry has an uncanny knack for identifying what’s hot and positioning Oracle accordingly,” Forrest said.

Despite Oracle’s remarkable performance, some experts caution against unbridled optimism. With its stock trading at nearly 30 times earnings—above its historical average—concerns over valuation have emerged. Oracle’s price-to-earnings (P/E) ratio now surpasses Alphabet’s, though it remains below that of Microsoft and Amazon.

CFRA’s Zino advises investors to exercise caution, suggesting alternatives like Microsoft for those seeking stability. “Given Oracle’s recent expansion, I’d recommend focusing on companies like Microsoft rather than Oracle at this stage,” Zino explained.

Market analysts also predict limited upside for Oracle shares in the near term. FactSet data shows that average price targets suggest the stock may remain rangebound over the next 12 months, following its extraordinary gains this year.

Nevertheless, Oracle’s role at the intersection of cloud computing and AI inference continues to attract optimistic investors. Nancy Tengler, CEO of Laffer Tengler Investments, considers Oracle’s positioning a significant advantage. Tengler’s firm began acquiring Oracle shares in May 2022, making it the largest holding in their actively managed ETF. “Oracle’s growth trajectory remains robust, and its partnerships with cloud providers and hyperscalers further enhance its prospects,” Tengler said.

Despite its elevated valuation, Tengler views Oracle as more attractively priced compared to peers like Microsoft and Amazon. She anticipates steady revenue growth over the coming years, underscoring the company’s ability to outpace traditional software providers. “While on-premise software companies are slowing down, Oracle is accelerating,” Tengler remarked. “Few companies are growing at Oracle’s current rate.”

Conclusion

Oracle’s resurgence highlights its ability to adapt and thrive in the fast-evolving technology landscape. The company’s strategic pivot to cloud infrastructure, coupled with its integration into the AI ecosystem, has reinvigorated investor interest. Larry Ellison’s leadership and marketing acumen have further solidified Oracle’s position as a key player in the AI-driven market.

While concerns over valuation and sustainability persist, Oracle’s renewed focus on innovation and its strong growth potential position it as a compelling force in the tech sector. For investors, the company offers a blend of opportunity and risk, making it a fascinating story to watch as the AI revolution continues to unfold.

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Adan Harris
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