Down 20%, Is Oracle a No-Brainer AI Buy?

Investors have favored artificial intelligence (AI) stocks over the past few years, seeing them as the ticket to an investing win. This is because AI has shown potential to revamp the way many things are done -- from business to daily tasks -- and as a result, supercharge earnings growth. Many companies involved in the development and use of AI already have started to reap the benefits, and this has been reflected in their stock performance. So investors who got in early made the right move.

But in recent months, various concerns have weighed on AI stocks -- from worries about investment levels in the technology relative to the revenue opportunity to general market headwinds, such as the war in Iran. As investors turned more cautious, even the strongest of AI stocks suffered. And that brings me to the subject of Oracle (NYSE: ORCL), a company that's emerged as a leader in the AI cloud market.

Down 20% this year, is Oracle a no-brainer AI buy? Let's find out.

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From database management to AI

First, let's consider the Oracle story so far. The company has been around for almost 50 years, so it didn't start out as an AI player. Instead, you may know Oracle for its strengths in database management, and this specialty has served as a springboard for the growth it's seeing today in another business: cloud infrastructure.

In recent years, Oracle has focused on ramping up its cloud business, and that proved to be a wise move, considering the level of demand today. AI customers greatly need capacity, and Oracle is offering this to them. In fact, cloud infrastructure has turned out to be a significant growth business, with revenue surging more than 80% to $4.9 billion in the recent quarter.

The company called the quarter "exceptional," with both total revenue and earnings per share on a non-GAAP basis climbing 20% or more for the first time in 15 years. And, importantly, this quarter reinforces the growth trends we've been seeing at Oracle in recent quarters.

An element has weighed on Oracle from time to time as the AI story unfolded, and that's been the profitability of offering compute -- such as graphics processing units (GPUs) -- to customers. The company sticks with its general guidance of gross margin for that business in the 30% to 40% range.

Oracle's higher-margin services

But it's important to keep in mind that this is just a part of the Oracle revenue picture. General-purpose compute and related services are also sold to customers, and in many cases, the mix of services has a higher margin. On top of that, Oracle's multi-cloud database service delivers gross margin in the 60% to 80% range. So if we look at the full picture, we can see that these various pieces make Oracle's data center business a highly profitable one.

Oracle announced it will raise $50 billion this year and already has made it to the $30 billion mark -- this is through investment-grade bonds and mandatory convertible preferred stock. This is meant to support the company's infrastructure build-out to serve tremendous AI demand, and an important point to note is this keeps Oracle within its planned range for 2026 financing.

Now, let's return to our question: Is Oracle a no-brainer buy right now? Oracle has reassured investors on various points in recent times, from the profitability of its AI business to its manner of funding the infrastructure ramp-up. The company has demonstrated growth in AI quarter after quarter, and Oracle and peers across the industry have noted the strength of demand.

Of course, any general concerns about AI spending or the pace of growth could resurface and weigh on the stock -- and geopolitical or economic news could do the same, since tech stocks are vulnerable during times of uncertainty. But this doesn't change the long-term AI story or Oracle's role in it.

Meanwhile, Oracle stock, trading at 20x forward earnings estimates, is around its cheapest over the past three years. All of this makes Oracle a no-brainer buy right now on the dip.

Adria Cimino has positions in Oracle. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.