For anyone concerned that artificial intelligence is fueling a bubble in technology stocks, Oracle Corp has entered the conversation.
Shares of the database software company have soared more than 80% this year, the seventh-best performance in the S&P 500 Index, as scorching demand for AI computing turbocharges its revenue growth. The latest leg of the rally came after Oracle projected revenue in its cloud-computing business will jump 700% in the next three fiscal years, sending the stock up 36% on Sept 10.
Oracle also has been linked to the Trump administration’s negotiations to keep TikTok operating in the US. The company has served as TikTok’s primary cloud infrastructure provider for years. On Wednesday, the White House extended the deadline for its ban of the Chinese video-sharing app until Dec 16 while talks continue. Oracle shares edged lower Wednesday, falling 1.9% after two consecutive days of gains.
The stock is now trading around the highest price-to-estimated earnings since the dot-com era at 43 times, making Oracle more expensive than eight of the nine most valuable companies in the S&P 500. Nvidia Corp., for example, trades at 31 times profits projected over the next 12 months and is expected to have much faster sales growth over that period.
“Investors viewed Oracle as a boring low growth company, and all of a sudden it’s an AI winner,” said Michael Bailey, director of research at Fulton Breakefield Broenniman. “But you’ve got a lot of risk. You’re buying the stock now based on hope that we’re going to see massive growth in year four, five and six.”
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Oracle's 2028 Earnings Outlook Soars
The long-term nature of Oracle’s anticipated expansion, with the heaviest growth coming several years from now, is a major reason why its stock looks so expensive, as analysts haven’t adjusted their earnings expectations for the current fiscal year and next. But looking at profits estimated over the next three years, Oracle’s multiple is a more manageable 25 times — although that’s still almost twice the average over the past decade.
“This year is irrelevant, next year is irrelevant, the year after that is more important,” Bailey said. “If you go out a few years, there’s going to be this massive spike in growth. You’ve got to value that today.”
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Of course, plenty of investors are comfortable taking a longer-term view with growth stocks. Two of the most popular examples — Tesla Inc. and Palantir Technologies Inc. — are priced at more than 180 times earnings projected over the next 12 months, compared with 27 times for the Nasdaq 100. Even over a three-year horizon, Tesla and Palantir are still very expensive at around 100 times.
But those companies are outliers. Nvidia, perhaps the most popular AI stock that has faced its own valuation scrutiny, is priced at 24 times earnings over the next three years, which is less than Oracle even though its profits are booming right now.
Futures Earnings Potential | Oracle's 36-month forward P/E more than 40% below its 12-month multiple
Oracle’s overall sales are projected to rise 17% in the current fiscal year, followed by 22% in 2027 and 42% in 2028, according to the average of analyst estimates compiled by Bloomberg. Nvidia’s revenue is expected to rise 58% this year, followed by 33% and 17% in the next two years.
“The multiple bakes in a very high likelihood that everything Oracle announced comes to fruition,” said Dan Eye, chief investment officer of Fort Pitt Capital Group. “I’d put us in the camp of being a bit more sceptical.”
Of course, there are inherent risks in relying on expectations for the next 12 months, much less three years. This is especially true when it comes to AI, which isn’t a proven moneymaker for most companies beyond providers of cloud-computing services and infrastructure.
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“The issue isn’t Oracle not getting the business, it’s the end customer — will they get the benefit out of it as fast as the market assumes?” said Sameer Bhasin, principal at Value Point Capital. “Back in the dot-com era, every time somebody put fiber in the ground, the stock would go up but they didn’t realise the end customer IRR was negative,” he said, referring to the internal rate of return.
So far, Oracle’s valuation hasn’t spooked Wall Street, where more than 70% of analysts recommend buying the stock. Of the 47 tracked by Bloomberg, there are 13 hold ratings and no sells.
Citigroup’s Tyler Radke raised his Oracle rating to buy after its September earnings report, citing the improved growth outlook as justification for investors to pay a higher multiple.
Oracle shares “still have upside from here with top/bottom-line growth significantly accelerating in the years ahead,” he wrote in a research note on Sept 10.
