Wall Street loves Oracle's AI story
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Record income from its AI cloud business, including nearly half a trillion dollars in outstanding contract revenue, sent Oracle's stock up about 40% Wednesday. This overshadowed the fact that the company missed analysts' earnings estimates.
Why it matters: It's a signal of how lucrative stock-picking can be, but only if you accurately forecast which companies can win over investors on their guidance alone. And that's a hazy game, since forecasts can be more storytelling than fact.
What they're saying: Oracle's competitive moat is "unclear," and the profitability of AI workloads remains a "key debate," Bank of America's research analyst Brad Sills wrote in a note.
- Nonetheless, he upgraded his rating on Oracle shares to a buy from a neutral rating, along with several other analysts who lifted their price targets on the stock.
By the numbers: Oracle's first-quarter revenue came in at $14.9 billion, just shy of the $15 billion estimate.
- Software revenue was down 1%.
- Cloud revenue, however, jumped 28%, and the company expects its cloud-infrastructure revenue to grow 77% this year.
Between the lines: Analysts are more focused on the future growth story than on current earnings.
- Contract revenue for the quarter that wrapped at the end of August hit $455 billion. Several analysts view this as a sign of future growth opportunities from these customers.
- Much of Oracle's forecast revenue has already been captured, according to Angelo Zino, tech analyst at CFRA.
- That gives him "high confidence in projections through the decade end," Zino wrote.
Yes, but: Projected earnings are not guarantees, and it's odd to see projections cause this big of a stock pop for a large-cap company. (It's the biggest one-day gain for Oracle since 1992.)
- Still, companies try to be accurate with their guidance since Wall Street can punish firms for not living up to promises.
Zoom out: The Street better be right on that. Wednesday's share pop has already made Oracle more expensive than chip giant Nvidia.
- After the earnings-driven spike, Oracle's price-to-earnings ratio sat above 77.
- Nvidia's P/E ratio is 50.
The bottom line: Investors are buying into Oracle's pitch that its AI cloud business is just getting started.
- But with shares as expensive as they are, the company will have to prove that its promised growth isn't just storytelling dressed up as guidance.
