Megacap technology behemoths such as Microsoft, Amazon, and Alphabet seem to be consistently at the center of anything related to artificial intelligence (AI) -- and for good reason.
Each of these "Magnificent Seven" members has made a number of strategic investments in AI, signaling to the investment community that the tech sector's next big frontier has arrived.
But among this intense competitive landscape, I see another company emerging as a strong force taking on the world's largest companies. Oracle (ORCL 1.30%) is currently undergoing a transformational change, and -- shocker -- AI is at the center of the narrative.
Let's dig into what's going on at Oracle and why I see the stock as a lucrative opportunity for long-term investors.
A transformation unfolding in real time
One of the biggest catalysts fueling growth in the technology sector right now is cloud computing. The thing is, simply referencing demand for cloud-based services is both vague and generic.
The big theme in cloud computing at the moment is the migration from on-premise solutions to off-premise infrastructure. On-premise software relies on local servers while off-premise solutions rely on external sources, like the cloud.
Cloud migration has become a particularly important focal point for businesses all of sizes over the last few years for a couple of reasons.
First, throughout much of 2020 and 2021 the world experienced the height of the COVID-19 pandemic, a black swan event that forced many people to adopt a work-from-home environment. These dynamics more or less forced businesses to act swiftly and ratchet up investments in external cloud solutions, as opposed to existing on-premise infrastructure.
Now, as the peak days of the pandemic wane, the world is witnessing yet another transformation unfold: the rise of artificial intelligence (AI). AI relies heavily on data in order to develop sophisticated technology such as large language models (LLMs), machine learning, and other generative AI applications.
According to Grand View Research, the market for cloud migration services could potentially grow to $70 billion by the end of this decade, translating to an annual growth rate of nearly 26% from now till 2030.
Traditional on-premise infrastructure is expensive to maintain, and oftentimes it lacks the level of sophisticated capabilities needed for many of today's AI applications. This structure does not allow for flexibility or rapid scale, which can slowdown a company's innovation and strategic roadmap.
For these reasons, it's not too surprising to see rising demand for off-premise cloud services.
Image source: Getty Images.
How is Oracle benefiting from these trends?
Oracle was founded 47 years ago, and since then the company has entered a number of different markets. At its core, Oracle is an enterprise software company that sells database management tools for resource planning, customer relationship management, and more.
But like many of its big tech peers, Oracle's evolution now appears to be greatly influenced by AI. The company's cloud services are witnessing abnormally high demand at the moment.
For Oracle's fiscal year 2024 (ended May 31), revenue from its on-premise solutions declined 12% year over year to $5.1 billion.
But guess what? Sales from cloud services and license support rose 12% annually to $39.4 billion. Oracle's management explained during the earnings call that this growth was directly correlated to rising demand for cloud migration solutions from on-premise to off-premise networks.
While migration services may initially give the appearance that Oracle's business is decelerating, I think the long-term tailwinds for off-premise solutions will far outweigh whatever business the company forgoes in its on-premise segment.
A good indication of Oracle's future prospects is its backlog. The company ended fiscal 2024 with $98 billion in remaining performance obligations. To put this into perspective, this was an increase of $18 billion just from the prior quarter.
Moreover, management shared with investors that much of the company's backlog is tied up in multiyear deals and that this growth was "driven by massive increases in sales of Oracle Cloud Infrastructure."
Overall, I see this as a very encouraging indication that cloud migration demand will serve as a bellwether for Oracle for years to come.
A great opportunity for long-term investors
The chart below benchmarks Oracle against a peer set of other leading cloud service providers.
ORCL PE Ratio data by YCharts
There are a couple of things to unpack here. First, the price-to-earnings (P/E) ratio of the S&P 500 is currently 27.5. With the exception of Alphabet, Oracle and its larger peers are valued at a meaningful premium to the market.
To me, this signals that investors believe the growth prospects between AI and cloud infrastructure are superior to what can be found elsewhere in the market. Second, Oracle is essentially valued right in line with Microsoft from a P/E perspective despite being materially smaller and owning less market share in the cloud space.
Given these valuation trends, it's fair to say that Oracle has likely experienced some valuation expansion thanks to broader bullish sentiment surrounding AI.
With that said, I wouldn't try to time my purchases of any stock too precisely. It's nearly impossible to know if these premiums will normalize at some point. Instead, I'd encourage investors to keep in mind that the overarching theme here is that there is a paradigm shift going on in the cloud industry and it's going to take years to play out.
I think Oracle's growth potential from cloud migration is very much just beginning in this new chapter of the AI narrative. I see Oracle as a no-brainer buy right now and think that investors will reap the most benefits by adding to their position over time and holding the stock over the next decade at least.
