Oracle’s $116 Billion Surge Leaves Little Room for Error on AI

(Bloomberg) — Oracle Corp. (ORCL) investors find themselves at a pivotal crossroads. Either heed the warning from a growing list of indicators that suggest the stock has run up too far, too fast — or continue to chase another rally that’s been supercharged by lofty artificial intelligence expectations. Most Read from Bloomberg Security Concerns Hit Some of the World’s ‘Most Livable Cities’ As Part of a $45 Billion Push, ICE Prepares for a Vast Expansion of Detention Space As American Architects Gather in Boston, Retrofits Are All the Rage How E-Scooters Conquered (Most of) Europe Shares of the software maker have soared 75% from April’s low, including their best two-day gain since 2001 after its earnings report last week showed AI-fueled revenue growth is gaining steam. However, that’s left the stock trading at it most overbought level in 25 years and at its steepest valuation in more than two decades.

And there are signs investors may already be balking. Oracle shares fell nearly 1% in premarket trading Tuesday as the Israel-Iran conflict drags on. That follows a nearly 2% decline on Monday, a day that saw the broader Nasdaq 100 Index rally 1.4%. Last week’s $116 billion rally has shifted the focus to Oracle’s execution, according to Dan Morgan, senior portfolio manager at Synovus Trust. Its growth opportunity from AI reminds Morgan of Microsoft Corp.’s push into cloud computing in the last decade or even Nvidia Corp.’s data center business in 2023.

“That could end up being too optimistic, but I think Oracle is in its teenager phase, not yet mature,” Morgan said. “We could maybe look back on this quarter as the moment we all realized how much more there is to come.” Oracle is best known for its database software but has been investing aggressively in its cloud-computing business. That spending appears to be paying off as the company predicted “dramatically higher” revenue growth for its upcoming fiscal year amid strong demand for AI-related services. Analysts expect that growth rate to be about 16%, up from 8.4% in fiscal 2025, which ended last month, according to data compiled by Bloomberg. Net income, meanwhile, is expected to rise 15% in fiscal 2026, and expansion in both metrics is projected to accelerate in fiscal 2027.

While Oracle’s market share within cloud computing remains below that of bigger players like Amazon.com Inc. (AMZN), Microsoft (MSFT), and Alphabet Inc. (GOOG, GOOGL), the results were the latest example of the company’s growing strength in AI. Earlier this year, it entered into a joint venture to provide OpenAI (OPAI.PVT) with computing power. Story Continues NYSE•USD (ORCL) Follow View Quote Details 211.10 - (-1.91%) At close: June 16 at 4:00:02 PM EDT Advanced Chart “AI represents the first material avenue for growth Oracle has seen in a long time, and it comes after a decade where the Street looked at Oracle as a company struggling to find new avenues of growth,” said Stephen Bersey, head of technology research at HSBC.

“Transitioning from a company growing in the mid-single digits to one where annual growth should be in the teens going forward deserves a different kind of valuation profile.” Still, the growth expectations have lagged the explosive move by Oracle’s stock price, causing its price-to-earnings ratio to balloon. At 31 times profits projected over the next 12 months, Oracle shares are priced at the highest since 2002 and nearly twice the stock’s average valuation over the past decade, according to data compiled by Bloomberg. “Although the multiple may be high, the growth warrants that, and given the growth outlook, we still think it looks attractive,” HSBC’s Bersey said. “Oracle is very well positioned for AI, and I expect AI demand will remain robust for the foreseeable future.” Top Tech Stories SoftBank Group Corp. raised around $4.8 billion through a sale of T-Mobile US Inc.

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