ORCL Stock: Why Oracle May Be the Beaten-Down Tech Giant Ready for a Comeback

TradingKey - Oracle(ORCL) has long been known as an established software business. With the rise in popularity of AI, however, it is now stepping into a new role in our industry: artificial intelligence infrastructure.

Most of the investing world continues to focus on hyperscale cloud providers, while Oracle is being looked at again as an under-followed benefactor from the growth of AI-related spending.

With the current weakness in orcl's share price, there is a renewed discussion about how to view Oracle's position in the marketplace. There are many bullish arguments that Oracle's pullback in price offers investors a unique chance to acquire a long-standing technology leader that is just beginning its next stage of growth.

Oracle's Shift from Traditional Software to AI-Based Infrastructure

Over the years, Oracle has created a name for itself through its databases, applications for enterprises, and other essential software used by many companies globally; because of this history, Oracle is still earning a great deal of reliable money through this traditional business; however, this traditional business does not offer the whole story when you consider Oracle's investment case today and into the future. 

Oracle has been rapidly expanding its product line into cloud-based infrastructure, which means that it has developed a cloud-based infrastructure product called Oracle Cloud Infrastructure (OCI) that can serve as an alternative to Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. 

OCI originally looked like a secondary service/product for Oracle; however, with the demand for more computing power to meet the needs for AI style tasks, OCI now has brought Oracle back into the forefront as a strategic competitor to these other companies—and now Oracle is not only going to be competing with other businesses providing software products but also with other businesses providing cloud infrastructures in one of the most explosive areas of technology spending today."

Reasons Why ORCL Is Receiving Increased Interest During The AI Cycle

The primary factor drawing attention to orcl is based upon demand for their products.

There is an increasing need for larger businesses and developers of artificial intelligence (AI) to be able to use data centres, GPUs, network connectivity and to secure environments in which to run their large model applications. This allows them to run their AI model applications on a larger scale and Oracle's cloud capabilities and enterprise relationships provide a solid base for AI developers therefore making Oracle the preferred choice among businesses.

The bullish argument for Oracle is supported by the following points:

• Existing Fortune 500 customer base is a simplification of cross-selling opportunities
• Excellent balance of software versus infrastructures growth.
• South Bean cloud computing is becoming more popular for stability and following governmental regulations.
• More companies are looking for computer processing power to support their AI needs.

Unlike other companies that are considered to be speculative based upon AI only, Oracle already has a core area of business that is profitable prior to the current AI market growth.

This combination of consistent cash flow and the growth of their infrastructure business provides the investor with a well-established company that is experiencing an exceptional amount of growth due to AI.

Valuation Gap: ORCL Stock vs Big Tech Peers

Investors are now looking again at ORCL stock primarily because of the valuation.

Historically, ORCL has traded at lower multiples than most of its big "AI bellwether" mega-cap peers and has been assigned lower valuations because it is not considered to be pure growth stocks like all of the other mega-cap AI peers.

Companies that are 100% considered to be pure growth stories, tend to trade at the highest multiples, whereas larger and more mature companies often receive a lower price in the market (discounted).

If ORCL can continue to drive higher cloud growth and capture additional AI growth, then that valuation gap could close.

This creates a great framework for potential re-ratings:

• In the case of growth missing expectations, ORCL would still have a profitable core business.
• If growth exceeds expectations, the market may price the stock higher.

This sort of asymmetry is often the area where you will find the best long-term opportunities.

Could Cloud Provide New Direction for Oracle?

The conventional view of Oracle has been that they are large, lumbering enterprise software providers who take a long time to get new products to market. This view may be outdated.

Cloud infrastructure sales are increasingly important to Oracle and their positioning with database-centred, performance-sensitive workloads provides them a niche that larger cloud vendors cannot dominate completely.

As AI continues to be adopted by companies, many will choose to take a multi-cloud approach instead of relying on one vendor. Oracle will benefit if those customers choose to diversify their workloads across different providers.

Oracle does not need to take over a large cloud provider but rather capture a meaningful share of increasing enterprise demand.

The ability to differentiate between these two things is key for investors.

Market Remains Cautious and Maintains Risk

Although the situation is becoming better, the level of skepticism about Oracle is still credible.

Oracle's main contenders consist of Amazon Web Services, Microsoft Azure, and Google Cloud. The major piece of competition all three companies have is massive scale and ecosystems as well as a lot of developers who are familiar with their products.

Building a cloud infrastructure is capital-intensive and the demand for AI changes quickly due to companies' budgets and overall world economic conditions, thus creating a second category of risk for Oracle regarding execution.

A third risk that Oracle faces is its image and how long it takes for the markets to revalue their assets versus how quickly it may revalue if most investors continue to consider Oracle a slow-growth, legacy business.

In turn, the very bullish thesis about Oracle will not be played out overnight; rather, that story will most likely be played out over an extended period of time.

What Investors Should Watch in ORCL Stock

Investors should keep an eye on the following indicators to determine whether Oracle’s recovery is actually happening:

• The revenue trends for Oracle Cloud Infrastructure (OCI).
• The amount of capital expenditures being made for data center expansion.
• New customers won from artificial intelligence (AI).
• The number of existing customers retained for these databases and applications.
• The continued resilience of Oracle's operating margin.
• Commentary from the management team regarding their backlog and the visibility of demand for their products.

These indicators will provide information about whether Oracle is simply riding the AI trend or if they are actually able to monetize this trend.

Market Implication: A New Way to Play AI

Most AI stocks are largely based on future potential. Not so with Oracle.

Oracle currently has:

• Relationships with large enterprise customers.
• Recurring revenue streams.
• Proven profitability.
• Relevancy in the growth of their infrastructure.

These characteristics make orcl stock a more balanced way to gain exposure to AI—not as explosive as early-stage names—but possibly less susceptible to volatility in sentiment.

For those investors looking to play AI without paying the high valuations currently associated with some of these stocks, Oracle is interesting as an intermediary option.

Bottom Line

Oracle Corporation can be considered an undervalued company that should recover quickly than its competitors. Beyond being known as just a legacy software vendor, Oracle is quickly becoming aligned with cloud computing growth and demand for artificial intelligence infrastructure.

The recent price weakness in its stock may not be indicative of continued stagnation, but rather a temporary period of consolidation before the company experiences substantial benefits from continual growth based on its ability to take advantage of increased demand.