Oracle Earnings: Cloud Infrastructure Demand Harvested from “Acres” of Large-Scale AI Model Clusters

Narrow-moat Oracle’s first-quarter results mildly beat our top- and bottom-line expectations as Oracle’s cloud services sector became Oracle’s largest sector—with help from all things artificial intelligence, as Oracle’s data centers host “acres” of Nvidia graphics processing unit clusters to power large-scale AI models. This, in turn, helped edge results higher due to the favorable mix. We are raising our fair value for the stock to $108 per share from $98, as revenue for the second quarter is guided nicely above our previous expectations. We have amped up our forecasts for near-term headway in Oracle’s infrastructure business. But, even with an improved stance on the stock’s worth, we caution investors that shares still look relatively rich, as we think future growth and profitability are moderated by Oracle’s lessening competitive stance in its legacy core business—database and enterprise resource planning software. In addition, as Oracle cloud infrastructure revenue increases, this has a short-term margin-dampening effect, even though long-term benefits from scale are likely.