To the casual observer, Oracle’s emergence as a serious player in cloud computing might have come out of the blue. But Barron’s readers shouldn’t be surprised.
In early 2021, I wrote a cover story headlined “Oracle Is Turning Into a Cloud Giant.” At the time,
Oracle
(ticker: ORCL) was pushing cloud-based versions of its database software and its portfolio of enterprise applications. Oracle was also aggressively building a cloud-computing business to take on the three cloud giants—
Amazon,
Microsoft,
and
Alphabet.
There was considerable doubt from investors about Oracle’s chances of success. But the company sure believed.
For that story, Clay Magouyrk, the executive vice president for Oracle Cloud, told me: “There’s no way that in the next two or three years, Oracle will be viewed as anything but a cloud company.”
Turns out, it was a great call from Clay. Oracle shares are up about 110% since our story. Last fall, when the stock had dropped to about $60 from a peak near $100, we wrote that the market had a second chance to buy the evolving cloud play on the cheap. The stock on Thursday closed at $126.55. Sure enough, the Oracle story is now all about the cloud.
The one wrinkle Magouyrk hadn’t anticipated—no one did—was the rapid emergence of generative artificial intelligence as a major driver for almost every company in the tech sector, and cloud-computing providers in particular. The market’s new enthusiasm for Oracle has pushed the 47-year-old company into the spotlight for the first time in many years, driving Oracle’s share price to record highs. It has made founder Larry Ellison the third-richest human in the world, behind his friend Elon Musk and LVMH CEO Bernard Arnault.
This past Monday, Oracle added fuel to the fire, posting better-than-expected financial results for the quarter and fiscal year ended in May. During the fourth quarter, Oracle’s cloud application business was up 45% from a year ago. Its cloud infrastructure business was up 76%, accelerating from 55% growth one quarter earlier.
A day after earnings, Oracle announced that it would be adding generative AI features across its enterprise software lineup in the coming weeks. And it unveiled a new partnership with the large language model start-up Cohere.
The torrent of upbeat news is forcing the stock’s skeptics to reconsider. Meanwhile, bulls are hiking their price targets to a level that would have seemed ridiculous only a few months ago. After Oracle’s earnings report this past week, Mizuho analyst Siti Panigrahi and Guggenheim’s John DiFucci both upped their targets to $150, about 20% above recent levels. As long as the company’s cloud business keeps gaining market share from larger rivals, the stock could run even higher than that.
This past week, I caught up with Magouyrk to discuss his updated view on Oracle’s cloud and AI business. He is as bullish as ever.
Magouyrk sees Oracle’s AI strategy in three layers. “At the bottom of the whole stack,” he says, “generative AI needs very large-scale infrastructure for training and for inferencing,” driving demand for Oracle’s cloud capacity. It helps that the company has a strong relationship with
Nvidia
(NVDA), allowing the company to offer AI customers arrays of thousands of GPUs to train new models.
A second layer, he says, combines large language models with expertise in specific vertical markets, and a big customer base. That’s where Cohere comes in. “They are incredible at building these large language models; we’re quite good at enterprise relationships, the security and privacy of your data, as well as building good infrastructure,” Magouyrk says.
The third part is applications. Oracle this past week said it intends to use generative AI to expand the reach of its enterprise software. “Think about generating job postings from [HR software], automatically filing police reports based on body-cam interactions for first responders, or automating and summarizing patient-discharge notes in healthcare applications. There are a myriad of uses.”
Magouyrk says that initially, most of the opportunity is at “the bottom of the pyramid,” helping companies train their AI models. “But in 15 years, it will be an inverted pyramid,” he says. “The opportunity will be to embed this technology in applications.”
Of course, Oracle isn’t planning to give any of this stuff away free.
Magouyrk says AI-enabled versions of Oracle’s flagship apps are coming soon. “We’re talking about months, not years. There’s a lot of demand—and a lot of value in that demand.”
As for the accelerating growth of Oracle’s overall cloud business, Magouyrk, who once worked as a senior engineer at Amazon Web Services, says it’s no surprise to him.
“Cloud infrastructure is a very large space, and it takes time for your business to grow,” he adds. “More people are taking this seriously than they were two years ago. We had all the ingredients except one: We had the sales force, we had the ability to serve customers in 150 countries, we had the capital to expand the business, we had the technology. What we had to do was show that it worked, to build references and get to the momentum. Now that that’s happening, we’re accelerating.”
Write to Eric J. Savitz at eric.savitz@barrons.com
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