Title: Evaluating Oracle's Slump: Should You Buy Stocks at a Discount or Steer Clear?
Revised Base Article:
Oracle's (ORCL -0.38%) share prices have witnessed a strong year, propelled by the revitalized interest in its cloud infrastructure business. Despite a dip following the company's fiscal 2025 second-quarter results, missing analyst estimates, and providing muted guidance, the stock continues to soar more than 60% year to date as reported.
Let's scrutinize Oracle's fiscal Q2 results to determine whether this stock price drop is a compelling buying opportunity or if investors should steer clear.
Oracle's Q2 Cloud Revenue Outpaces Expectations
For the fiscal 2025 Q2 ended Nov. 30, Oracle's revenue increased by 9% year-over-year, narrowly missing the 8% to 10% predicted growth range and barely falling short of the $14.1 billion analyst consensus. Nevertheless, cloud revenue surged 24% year-over-year, reaching $5.9 billion.
Within the cloud segment, cloud infrastructure revenue skyrocketed 52% to $2.4 billion, and cloud application revenue climbed 10% to $3.5 billion. Overall, there was an impressive acceleration from the 22% cloud revenue growth seen in the previous quarter.
Oracle reported exceptional demand for artificial intelligence (AI) during the quarter, outpacing supply. This led to a jaw-dropping 52% increase in Oracle Cloud Infrastructure (OCI) consumption revenue, alongside a staggering 336% surge in GPU consumption.
According to Oracle, OCI is becoming a go-to choice for training numerous significant generative AI models, boasting superior speed and cost efficiency compared to other cloud networks. The company also recently secured a deal with Meta Platforms to employ Oracle's AI Cloud Infrastructure, and jointly develop AI agents based on Meta's Llama models. Notable AI clients include OpenAI, xAI, and Cohere, with Oracle now operating 98 live cloud regions, with a promise of further expansions in the months ahead.
Total remaining performance obligations (RPO) soared 49% to $97 billion, with cloud RPO swelling nearly 80%, accounting for approximately 74% of the company's total RPO. Oracle projects recognition of about 39% of the current RPO as revenue within the subsequent 12 months, and the growth pace of the RPO continues to speed up.
Regarding adjusted earnings per share (EPS), it inched up 10% to $1.47, falling just short of the anticipated $1.48 by analysts.
Looking ahead, Oracle projects fiscal third-quarter revenue growth of 7% to 9%, with cloud revenue expansion targeting 23% to 25%. Adjusted EPS is expected to ascend by 4% to 6%. For the entire fiscal year, the company remains optimistic about double-digit revenue growth, with total cloud infrastructure revenue expected to surge by more than 50%.
Should Investors Buy the Stock Dip, or Tread Cautiously?
Oracle's cloud infrastructure business remains buoyant, as proved by its deployment of its largest-ever supercomputer boasting 65,000 Nvidia GPUs, increasing its operational capacity. The company is increasing its capex investments to capture this opportunity, with capex rising to $4 billion from $2.3 billion in fiscal Q1. However, this increased capex spending resulted in a $2.7 billion negative free cash flow during the quarter.
Although RPO growth remains significantly strong, growth rates have slightly tapered from Q1 levels, and the early, rapid growth seems to be leveling off. Furthermore, the anticipated TikTok ban in the near future poses a potential hindrance, as its owner, ByteDance, has been a notable Oracle customer. A potential TikTok ban in the United States could impact the company adversely, although the burgeoning cloud infrastructure demand might help mitigate these concerns.
Oracle currently trades at a forward P/E ratio of approximately 28 based on current fiscal-year analyst estimates. While this is not unaffordable, like many other tech giants, Oracle carries a substantial debt load of $77.4 billion, with negative free cash flow of $2.7 billion during the quarter. Given this financial predicament, coupled with the company’s high-single-digit revenue growth and 10% earnings growth, investors might want to explore better investment opportunities to profit from the AI infrastructure boom.
In light of Oracle's strong performance in its AI and cloud infrastructure businesses, with a 52% increase in OCI consumption revenue and a deal with Meta Platforms, some investors might consider investing more money in Oracle stock to capitalize on its AI infrastructure boom. However, the company's high forward P/E ratio of 28 and a substantial debt load of $77.4 billion, along with negative free cash flow during the quarter, might persuade others to seek alternative investment opportunities with more favorable financials.
