Oracle Stock Is Down 60%: Why Its AI Cloud Explosion Makes It a Compelling Buy

The share price of Oracle (NYSE: ORCL) has plunged more than 60% from its 52-week high, and the stock currently trades at $136. This reflects investor concerns around the heavy capital spending to support the company's data center build-out, but it's difficult to overlook the level of demand in Oracle's cloud business.

Cloud revenue growth has accelerated from 28% year over year in the August-ending fiscal first quarter to 47% growth in the fiscal fourth quarter. Demand for artificial intelligence (AI) services drove a 93% increase in the cloud infrastructure business last quarter. While there are risks, the disconnect between cloud growth and its stock price presents a compelling opportunity for investors.

Image source: The Motley Fool.

Oracle's cloud advantage

Oracle's momentum reflects a key competitive advantage in the cloud market: data security. Enterprises want to use AI to boost productivity, but it's also essential that they keep their data private and secure when using AI models from OpenAI, Anthropic, and others.

Its cloud infrastructure is differentiated from other hyperscalers through its secure data-isolation architecture. This separates the cloud control computers from the customer's compute nodes. This allows an enterprise to control its data behind its own firewall, which seems to be a key selling point driving greater demand for Oracle's cloud business.

Oracle provides the data center infrastructure for AI training and inference, along with industry expertise for running enterprise software. It essentially serves as the customer's digital hub.

CEO Mike Sicilia hinted at a huge opportunity for Oracle: 
"We're on the front end of one of the most interesting times in the technology business." Oracle's cloud revenue trajectory in recent quarters suggests that customers are moving past the testing stage of AI and actively implementing it to run their businesses.

Growth and value outweigh the risks

Building data centers is capital-intensive. Oracle's capital expenditures are growing faster than the cash it is generating from operations. It has also issued more debt to fund its data center build-out. Its total debt has increased by $57 billion over the last year, while its free cash flow has tanked to negative $23.7 billion on a trailing 12-month basis.

The lower free cash flow and higher debt load have raised concerns around Oracle's financial health. However, the company's debt-to-equity ratio has declined from 5.3 to 3.9. This shows Oracle shifting from a debt-heavy business to an asset-heavy one focused on owning data center infrastructure for an AI-driven economy.

Importantly, Oracle is not spending without contracts in place. Remaining performance obligations, which are contracted revenue, ended the quarter at $638 billion. Once the data center infrastructure is in place and Oracle fulfills this demand, earnings and free cash flow should grow significantly.

The stock's forward price-to-earnings multiple has dropped to 17, while analysts have raised their earnings growth estimates to 28% annually over the next few years. The stock looks undervalued, but, of course, the shares could hit new lows before rebounding.

A slowdown in data center spending is a risk that would likely pressure the stock. But from a long-term perspective, the company's advantages in the cloud market and lower valuation could deliver outstanding compounding returns for investors.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.