Nvidia has been a frontrunner in the artificial intelligence (AI) space thanks to its graphics processing units (GPUs), which have played a crucial role in the training and deployment of AI models. But the stock has fallen out of favor recently as investors worry about slowing growth.
This is evident from the fact that the stock has fallen 5% since the release of its fiscal 2025 second-quarter earnings on August 28. The chipmaker’s quarterly revenue rose an impressive 122% year-over-year to $30 billion last quarter as it continued to dominate the AI chip market, while its stellar pricing power resulted in a 152% year-over-year increase in adjusted earnings to $0.68 per share.
However, management’s forecast of revenue growth at a relatively slower 80% YoY pace in the current quarter seems to have made investors nervous. There’s no doubt that Nvidia is still on track to grow at a very healthy pace and remains the undisputed leader in the AI chip market, but it seems the company’s expensive valuation is working against them.
Meanwhile, another AI company that recently reported results has seen its stock price soar despite growing much slower than Nvidia. Here’s a closer look at that name and why it looks like a solid AI stock right now.
AI Helps Oracle Build a Great Revenue Pipeline
Oracle (NYSE: ORCL) has jumped into the spotlight this year as AI is driving a clear acceleration in the company’s cloud business. That’s why shares of the company, traditionally known for its database software, surged more than 11% after reporting its fiscal 2025 first-quarter results (for the period ending Aug. 31) on Sept. 9.
Total revenue rose 8% year over year to $13.3 billion in constant currency, beating the consensus estimate of $13.2 billion. Adjusted earnings rose faster at 17% from the year-ago period to $1.39 per share, again topping the Wall Street estimate of $1.33.
All eyes, however, were on Oracle’s remaining performance obligations (RPO), a measure of the total value of a company’s contracts that are due to be fulfilled at a future date. The company’s RPO rose 53% from the same quarter last year to a record $99 billion, suggesting it’s building an impressive revenue pipeline that should accelerate its growth over the long term.
More specifically, Oracle’s total cloud revenue increased 22% year over year during the quarter to $5.6 billion, while cloud infrastructure revenue spiked 46% to $2.2 billion. Management said it signed 42 additional cloud GPU contracts totaling $3 billion in the prior quarter.
Additionally, demand for Oracle’s cloud infrastructure is outpacing supply, and so the company wants to continue investing in capacity to serve its growing end market. As a result, it said capital spending in fiscal 2025 would be double what it was last year. That may seem like an ambitious move, but demand for cloud infrastructure to train and deploy AI models is growing rapidly.
Customers are renting Oracle’s infrastructure to scale AI development, and this trend is likely to continue for a long time. Goldman Sachs estimates that demand for cloud services could grow at a compound annual rate of 22% through 2030, generating $1 trillion in annual revenue. The investment bank points out that generative AI could account for $200 billion to $300 billion of this spending, driven by investments by companies looking to create AI applications.
Specifically, the infrastructure as a service (IaaS) market, which was Oracle’s fastest-growing segment last quarter, could generate $580 billion in revenue by 2030. Therefore, the company could be on the cusp of a massive growth opportunity, as IaaS revenue was $2.2 billion in the first fiscal quarter, translating to annual revenue of $8.8 billion this fiscal year.
Stronger growth could boost stock prices
Management says the strong contract portfolio will drive revenue growth in fiscal 2025. As a result, the company expects revenue to increase 8% to 10% in constant currency in the second fiscal quarter, which would be a slight improvement from the previous quarter.
More importantly, the company is confident that revenue will grow by double digits in fiscal 2025, with total annual cloud infrastructure revenue growing faster than last year.
Analysts expect these double-digit growth rates to continue in the coming financial years.
But investors have already seen how big the cloud computing market is expected to become thanks to the adoption of AI. So don’t be surprised if Oracle’s growth improves in the coming years, and the market could reward that with more upside.
Therefore, it may be a good idea for investors to buy Oracle while the company is trading at an attractive 25 times forward earnings, a discount to expected earnings. Nasdaq-100 index’s earnings multiple of 31 (using the index as a proxy for tech stocks). This AI stock could fly higher after the 54% gain it has posted so far this year.
Should You Invest $1,000 in Oracle Now?
Before buying Oracle stock, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Oracle wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $715,640!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 16, 2024
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia and Oracle. The Motley Fool has a disclosure policy.
Forget Nvidia: This Top AI Stock Is Skyrocketing — and Could Rise Higher Still was originally published by The Motley Fool
