Yahoo Finance Why Oracle stock is down amid its AI push
AI may be the new gold rush — but tech companies are finding out that patience is needed when it comes to reaping the benefits.
Take enterprise software giant Oracle (ORCL), whose co-founder Larry Ellison has championed heavy investments in AI. Shareholders haven't rewarded those efforts; its stock declined almost 5% over the past month after it released its fiscal 2024 Q1 results.
The natural question, then, is why? To put it simply, "monetizing AI takes longer than you might think," said Citizens JMP Securities analyst Pat Walravens via phone. "That's the history of these technologies."
Oracle reported an 8.7% increase in revenue year over year for its last quarter — a stark decline from the 18% growth the company clocked this time in 2022. The company is incorporating generative AI features into its SaaS offerings, while building up data centers to provide the massive computing powers its clients need to run AI models.
However, its efforts haven't shown up in its numbers the way that investors may have hoped.
"While the immediate impact of the AI hype may be a little overzealous, the theme does have staying power," Jamie Meyers, Laffer Tengler securities analyst, told Yahoo Finance. "That said, ramping these products requires an immense amount of capex, which negatively impacts free cash flow. This hinders near-term valuation, but ultimately, it’s a tradeoff for higher growth long term."
On the upside, Oracle has seen no shortage of demands — like others, it's struggling to secure enough GPUs to build up its cloud computing infrastructure. Additionally, the company's $28 billion acquisition of medical records company Cerner has posed challenges. After initially getting a bump from absorbing the business, Oracle is back to looking for organic growth.
And bringing Cerner into the fold hasn't been a smooth process. Oracle's 10-year, $16 billion contract with the Department of Veterans Affairs to digitize medical records has been rife with glitches, renegotiations, and even a pause.
"Integrating Cerner will be another challenge for the company — it is transitioning revenue from licensing to a cloud-based subscription model, which can cause some choppiness," said Meyers.
That said, Oracle's not in a bad spot, it's just facing a hill to climb where, yes, it could stumble and slide back down. However, the company's investments in AI and health will likely start to pay off at some point, it's more of a question of when and execution.
Some even say it's a buying opportunity. The short-term decline could create a good entry point, and Oracle appears to trade at a relative discount to its peers, considering its growth potential and 2024 outlook, according to Meyers.
Other analysts like John DiFucci of Guggenheim, who rates the stock a Buy, puts Oracle as an eventual winner of the generative AI boom.
"What’s needed is massive amounts of data and compute to run AI workloads – and that exists in the Cloud, so we believe the hyperscalers should benefit. If one can provide better performance at a lower cost, that hyperscaler will eventually see outsized gains – and we believe Oracle fits this bill," DiFucci wrote on Oct. 20.
Investors will have to wait to see the fruits of Oracle's labor. "Overall AI revenue will be limited in fiscal year 2024, with a larger revenue ramp estimated in fiscal year 2025 as Oracle services come online," Jefferies analyst Brent Thill wrote on Oct. 19.
Until then, it all goes back to the Nvidia (NVDA) GPU shortage. Once Oracle gets its chips, it can accelerate order fulfillment, and send its AI monetization barreling forward.
The question investors should be asking then is, according to Walravens: "When are they going to be able to get enough Nvidia GPUs to fill the backlog of AI orders? Will someone else, like AMD (AMD), be able to help? Can they find a way to break this logjam?"
Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on X, formerly Twitter, at @agarfinks and on LinkedIn.
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