Every Oracle stock investor should watch this December ratio

On December 5, 2024By Littum

Oracle (NYSE: ORCL) was founded in 1977 and has participated in almost every technology revolution since. It initially rose to prominence on the back of its database management software, but it then helped its business customers prepare for the dawn of the Internet, cloud computing and now artificial intelligence (AI).

Oracle operates some of the best data center infrastructure in the industry for AI development, and demand significantly outstrips supply. The company will report its financial results for its first quarter of 2025 (which ended November 30) in early December, and there is one number that every investor should keep an eye on.

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People watching a mobile device in front of stacks of supercomputers. — Image source: Getty Images.

To make AI chatbots and software applications “smarter,” they need to run on bigger major language models (LLMs). Industry-leading LLMs—such as those developed by OpenAI and Anthropic—now have trillions of parameters, making them highly knowledgeable about a variety of topics. Training these LLMs requires a lot of computing power, as does deploying them for customers to use, which is known as the AI inference stage.

Both training and inference take place inside data centers filled with graphics processing units (GPUs) from vendors such as Nvidia. Tech giants like Oracle build, manage and lease this infrastructure to developers for a fee, usually charged per minute. Therefore, these developers will flock to data center providers with the fastest data centers because that usually means lower costs.

Oracle Cloud Infrastructure (OCI) Superclusters allow developers to scale up to 65,536 Nvidia GPUs (and soon more than 131,000 of the latest Blackwell GPUs), more than any other data center provider. In addition, the company’s Random Direct Memory Access (RDMA) network technology moves data from one point to another much faster than traditional Ethernet networks, contributing to lower costs.

Automation is another key factor. Regardless of size, each Oracle data center is identical in functionality. This means that the company can operate all of them using software without the need for human staff. This naturally keeps costs down, but it also enables Oracle to build and launch new data centers extremely quickly.

Oracle is widely recognized as one of the most cost-effective data center operators in the industry, which is why it attracts top AI start-ups such as OpenAI, Cohere and Elon Musk’s xAI. In fact, the company can’t keep up with demand — it had 162 data centers either live or under construction as of its fiscal 2025 first quarter, but it plans to eventually have between 1,000 and 2,000.

The revenue that Oracle generates by leasing its data centers is included under its OCI segment. This part of the company’s business brought in record revenue of $2.2 billion during the first quarter of fiscal year 2025, which was a 45% increase over the same period last year.

This growth rate accelerated from the previous quarter, and the company has often said that OCI revenue could grow at least 50% consistently.

A bar chart of Oracle Cloud Infrastructure revenue and its year-over-year growth rate.

As I mentioned earlier, Oracle cannot keep up with demand for its data centers. It’s building new ones as fast as it can, but a lack of supply is the primary reason OCI revenue hasn’t increased by 50% or more over the past few quarters.

It is reflected in the company’s remaining performance obligations (RPOs), which are similar to an order backlog. RPOs came in at a record $99 billion during Q1, up a whopping 53% year-over-year. Oracle said it signed 42 new contracts for GPU computing capacity during Q1 alone, worth $3 billion.

OCI revenue (and its growth rate) is the key metric investors should watch when Oracle reports its latest results this month.

Oracle stock is up 72% so far in 2024 and is trading near record highs. Based on the last 12-month earnings per share at $3.88 and the share price at $181.41 at the time of writing, it trades at a price-to-earnings (P/E) ratio of about 47.

That’s a premium of 48% to Nasdaq-100 index, which trades at a P/E of about 32, suggesting that Oracle stock is quite expensive relative to its big-tech peers.

Therefore, investors with a time horizon of one year or less should probably avoid buying this stock. However, the picture looks a little different for investors willing to hold the stock for the next five years or more.

The automated nature of Oracle’s data centers should drive its gross margin wider at scale. Therefore, if the company expands its data center footprint by the 10x I mentioned earlier, its earnings growth could accelerate over the next few years.

That alone can lead to excellent long-term returns for investors, even if they are paying a premium for the stock today. However, this scenario depends on continued strength in the OCI segment, so it’s important to monitor Oracle’s results not just in December, but in every quarter to come.

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Anthony DiPizio has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Nvidia and Oracle. The Motley Fool has one disclosure policy.

Every Oracle stock investor should watch this December ratio was originally published by The Motley Fool