Financial report preview | Cloud giant Oracle (ORCL.US) performance coming! Can the "AI faith" create another wave?

With a strong reputation in cloud computing services and database software globally, tech giant Oracle (ORCL.US) will release its financial report for the third quarter of the 2024 fiscal year, ending in February, after the US stock market closes on March 11 (early morning of March 12 Beijing time). According to market expectations compiled by investment research platform FactSet, Wall Street analysts overall expect Oracle's adjusted earnings per share for Q3 to increase by 13% year-on-year to $1.38; total revenue for Q3 is expected to increase by 7% year-on-year, reaching $13.3 billion. In terms of details, Wall Street analysts predict that Oracle's revenue growth will be strongest in cloud services, including IaaS and SaaS, as well as license support businesses, including subscription-based software services under Oracle. It is worth noting that the two global cloud giants, Amazon AWS and Microsoft Azure, have previously reported impressive cloud service revenue. According to FactSet's expectations, revenue from these businesses is expected to grow by 11.4% to reach $9.9 billion. In addition, Wall Street analysts also predict that Oracle's net profit for the third quarter will increase by 14% to $3.87 billion. Riding on the wave of AI, Oracle's stock price has increased by 40% in the past year and is currently approaching new highs, with a 7% increase since 2024, almost matching the performance of the S&P 500 index. As global tech companies intensify their efforts to deploy generative AI technologies like ChatGPT, Oracle is seen as one of the biggest winners in this trend, with its global customer base for IaaS and cloud computing application software growing larger. However, Oracle's stock price has been in a state of panic recently, but its financial report for the third quarter provides this tech giant with another key opportunity to prove itself as a winner in the field of artificial intelligence. Oracle's current stock price has dropped by 9% from its six-month high of nearly $130 in September last year. The stock showed an upward trend in the first half of 2023, but has been sideways since September last year due to two consecutive quarters of underperforming results, closing at $112.42 per share at the end of last week. Analysts have recently been raising their performance and stock price expectations for this 46-year-old tech company, mainly based on the huge growth potential of its cloud computing services as customers shift towards deploying AI products. However, two disappointing performance reports since then have weighed down Oracle's stock price. In the AI field, "super sell shovels" Nvidia (NVDA.US) has single-handedly revived the "AI belief" of global tech stock investors, and the faith in AI among tech stock investors may continue to create significant waves in global stock markets. The "AI belief" since 2024 has had a greater impact on global stock markets, including the US stock market, than expectations of the Federal Reserve cutting interest rates. Global tech stock investors are now eagerly awaiting Oracle's performance, hoping that the company's financial report will continue to fuel the strong bullish sentiment that has recently driven the rise in US stocks and that Oracle's performance will trigger a new wave of optimism driven by the "AI belief" in the stock market. Oracle, a veteran tech giant, one of the big winners in the AI trend Why has Oracle, a veteran tech giant, gained favor from a large number of investors in the secondary market? This is mainly because the company's business has fully transitioned to the cloud computing field in recent years, and the AI trend has helped drive a significant increase in revenue in this area, with the market increasingly optimistic about the company's performance prospects in the AI era, thus continually pushing up the valuation of this old tech giant. Oracle, Google Cloud Platform under Google, AWS under Amazon, and Azure under Microsoft are among the major global cloud computing service providers, offering one-stop cloud service deployment from IaaS to SaaS. Their customers can choose to deploy applications on the cloud infrastructure provided, or use hosted cloud platforms to develop and run generative AI and other applications. These companies have established large networks of data centers worldwide, allowing users to choose the data center closest to their region for hosting and processing their data and applications. The future prospects of Oracle's AI-related services are very promising. In the third quarter (the first quarter of Oracle's 2024 fiscal year), the company was selected by the renowned AI startup MosaicML as the preferred cloud infrastructure (IaaS) partner for accelerating AI model training. In addition, as demand for cloud services and AI services from customer groups accelerates, Oracle has announced free training and certification programs. Oracle's management continues to push forward a strategic shift to accelerate the transition of its flagship products/services (such as Fusion, NetSuite, and MySQL) to the cloud platform, helping this veteran tech company achieve business expansion in recent years. In terms of revenue growth in the past year, Oracle's revenue scale has returned to an upward trend, largely indicating that the company's cloud computing-related services are benefiting from the growing demand for cloud computing services in the global enterprise AI layout. A renowned research firm, Wolfe Research, wrote in a report that the booming development of generative AI requiring strong computing power could boost strong demand for Oracle's cloud computing services from global enterprises. Investors closely monitor Oracle's OCI revenue growth and capital expenditure guidance The performance growth of Oracle's cloud computing infrastructure business (in the IaaS field) will be closely watched. Oracle's Oracle Cloud Infrastructure (OCI), which hosts the vast majority of large AI-based databases for Oracle's customers, is expected to benefit from the "gold rush" that AI is bringing to cloud computing services, as stated by Larry Ellison, Oracle's founder and chairman, after the release of their quarterly financial report in December last year. This may be good news for Oracle's OCI business, as analysts generally believe that AI is driving increased spending on cloud services.Long-term growth is crucial for both OCI and Oracle's overall performance.However, Oracle's stock price also dropped significantly after releasing performance reports in September and December last year. The main issue is that the revenue growth rate of Oracle's cloud infrastructure business (OCI) has slowed for two consecutive quarters. Although the revenue data brought by Oracle's cloud infrastructure business in the quarter ending in November surged by 52% year-on-year, reaching $1.6 billion, the revenue growth rates in August and May quarters were as high as 66% and 76% respectively. The quarter ending in November also showed that Oracle's cloud service revenue, covering from IaaS to SaaS, grew by 25% year-on-year to $4.775 billion, slower than the previous quarter's 30%, indicating a continuous slowdown in Oracle's cloud computing service revenue growth for two consecutive quarters. Overall, Oracle's OCI growth rate is still faster than competitors in the cloud services field such as Amazon's AWS, Microsoft, and Google under Alphabet. But Oracle is catching up. According to a report by Synergy Research Group in February, Oracle's overall share in the cloud services market was less than 5% by the fourth quarter of 2023. Synergy's survey data showed that in the last few months of 2023, Amazon accounted for about 31% of the total sales of the cloud services market, while Microsoft and Google accounted for approximately 24% and 11% respectively. Barclays analyst Raimo Lenschow recently wrote in a client report, "All eyes will be on Oracle's AI capital spending in this quarter given Oracle's ambitions in the field of artificial intelligence." In December last year, the company stated that there is an immense demand for cloud services related to artificial intelligence. However, one of the major challenges Oracle faces is expanding the underlying hardware and software infrastructure to support its cloud services to meet customer demands. As described by Oracle, expansion has encountered some bottleneck challenges. This includes acquiring enough high-performance computing chips, such as NVIDIA's H100 AI chip. Additionally, Oracle's capital expenditure for the first six months of this fiscal year was $2.4 billion, lower than analysts' expectations. However, the company's CEO Safra Catz reiterated in December last year that the capital expenditure expectation for the fiscal year ending in May was $8 billion, indicating that the company plans to increase spending. "Capital expenditures may be a more critical figure to watch, as we need to see meaningful expansion to support the growth scale of Oracle's cloud services/artificial intelligence infrastructure services in the coming quarters," wrote Barclays analyst Lenschow. The analyst's rating for Oracle is "hold," with a target price of up to $140 in the next 12 months. Before Oracle officially announces its performance for the third quarter of fiscal year 2024, Wall Street analysts are generally bullish. Evercore ISI Group set Oracle's 12-month target price at $130, maintaining an "outperform" rating. Wolfe Research also set Oracle's target price at $130, maintaining an "outperform" rating.