Summary
Oracle's FYQ4 earnings call reveals a successful pivot towards generative AI, bolstered by strategic partnerships with NVIDIA and Cohere, and over $2B contracts from AI startups for OCI capacity.
Despite potential GPU capacity constraints, ORCL has positioned itself as a leading AI player with a robust cloud infrastructure and a focus on privacy-centric AI services.
Oracle's strong revenue growth and consistent EBIT margins indicate financial resilience, but high capital intensity and above-average valuation warrant cautious optimism for potential investors.
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Oracle's $Oracle(ORCL)$ FYQ4 earnings call provided an exciting glimpse into the company's strategic trajectory towards generative AI, a focus that has already begun to yield impressive results. This deep dive into the earnings call reveals how Oracle is not only embracing the future of AI, but leading it. From leveraging Oracle Cloud Infrastructure (OCI) to partnering with industry leaders such as Nvidia $NVIDIA Corp(NVDA)$ and Cohere, Oracle's AI strategy is both ambitious and calculated. Yet, as we delve into the fiscal numbers and market positioning, it's clear that the road ahead, while promising, comes with its unique challenges.
FYQ4 Earnings: Pitching Oracle AI
Based on the latest FYQ4 earnings call, Oracle's strategic alignment towards generative AI is clearly bearing fruit and is, in our opinion, a major factor to keep the spotlight on Oracle in the near future. This shift in Oracle's focus presents a compelling growth narrative for the company in the burgeoning field of AI, highlighting Oracle's capability to pivot and innovate.
Oracle's OCI is exhibiting strong traction in the generative AI space. The high-profile endorsement of OCI's GPU clusters by Nvidia for its AI infrastructure needs speaks volumes about OCI's robust and cost-effective AI capabilities. This is a significant feather in Oracle's cap and showcases their potential to engage with industry leaders.
Moreover, Oracle's partnership with Cohere to provide private and secure generative AI cloud services for enterprise customers signals a strategic pivot towards empowering businesses with privacy-centric AI capabilities. In our view, this strategy demonstrates Oracle's vision in blending advanced AI training with privacy, an attribute that is increasingly critical in today's data-sensitive business landscape.
The announcement that over 30 companies, including notable AI startups like Mosaic ML and Adept AI, have committed to purchasing more than $2B in OCI capacity in recent quarters is an impressive testament to Oracle's burgeoning presence in the AI field. While it is true that these bookings likely span both FQ3 and FQ4, the trend is a clear indicator of the confidence these cutting-edge firms have in Oracle's offerings.
That said, we recognize that Oracle's explosive growth in the AI domain could potentially run into a bottleneck concerning GPU capacity. This constraint could present a challenge to Oracle's growth trajectory in the short term. Hence, Oracle's next moves to address this bottleneck will be crucial.
In the overall analysis, based on the FYQ4 earnings call, Oracle is solidifying its position as a significant player in the AI arena. With a robust cloud infrastructure, strategic partnerships, and a keen focus on privacy-centric AI capabilities, Oracle is carving out a competitive niche in the industry. However, the company will need to address potential constraints effectively to continue this upward trajectory.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
In the wake of ORCL's recent Q4 earnings, it's clear that this company is on a solid growth trajectory. Its revenue increased by 16.9% y/y to $13.8 billion, aligning with consensus estimates, and it achieved an EPS of $1.67, exceeding the consensus by 5.6%. It's noteworthy that despite a slight decrease in operating margin from 47.2% to 44.6% compared to last year, the EPS still managed to grow by 8% y/y. The company's resilience in a dynamic market environment is commendable.
ORCL's performance has seen steady improvement over the past three fiscal years, with revenue growing at a CAGR of 8.5%. The company is projected to continue this trend, with revenues forecasted to grow by 7.2% and 7.6% over the next two fiscal years, reaching $53.5 billion and $57.5 billion, respectively. However, it is important to note that this growth is not all organic, as the company closed on its $28 billion acquisition of Cerner in June 2022.
However, it's concerning to see that the EBIT margin decreased by 2.5% points from 44.5% to 41.9% over the past three years, but forecasts suggest a rebound to 43.2% this fiscal year and further to 44.2% the following fiscal year.
We are encouraged by ORCL's judicious use of share repurchases to offset shareholder dilution. The company spent 6.0% of its revenue on share-based compensation (SBC) over the past three years, during which it decreased its diluted outstanding common shares by 16.8%. This strategy, in combination with revenue and margin dynamics, contributed to an EPS CAGR of 9.4% over the past three years.
Free cash flow forecasts are a mixed bag. The current fiscal year forecast of $10,642 million, representing a 19.9% FCF margin, is lower than that of four years ago at $11,671 million, a 29.9% FCF margin. Despite the margin compression, ORCL has managed to generate an average FCF margin of 23.0% over the past four fiscal years, demonstrating its ability to generate cash consistently.
The 9.5% average capex as a percentage of revenue signals a relatively high capital intensity, potentially leading to less financial flexibility in the future. Nevertheless, the company's robust return on invested capital of 10.8% is promising.
ORCL's net debt standing at $80.3 billion indicates a leverage of 3.0 times to its expected current-year EBITDA of $27.2 billion. This leverage is slightly concerning, but not alarming. The company's current dividend yield of 1.4% is 12 bps below the S&P 500's dividend yield.
A standout point is ORCL's outperformance relative to the broader market. Over the past year, the stock returned 76.5%, or 63% more than the S&P 500. It is trading 38.0% above its 200-day moving average and a whopping 92% above its 52-week low of $60.78 per share.
In terms of valuation, ORCL is currently trading at an EV/Sales multiple of 6.9, an EV/EBIT multiple of 15.5, a P/E multiple of 18.5, and a FCF multiple of 23.9. Relative to the S&P 500, ORCL commands a premium in EV/Sales and P/E, and a slight discount in EV/EBIT. Its FY2 PEG ratio stands at 1.7, a premium of 1.4% to the S&P 500.
ORCL's current forward 12-month P/E ratio stands at 20.7. This compares to a 5-year mean of 14.2, falling outside the 2-standard deviation range of 10.4 to 18.0. Consequently, it's evident that ORCL is trading at a historically high valuation. Given this elevated level, the market appears to have priced in much of ORCL's growth prospects, which may limit its upside potential in the near term.
When compared to peers IBM $IBM(IBM)$, Microsoft $Microsoft(MSFT)$, and Salesforce $Salesforce.com(CRM)$, which trade at forward 12-month P/E ratios of 14.1, 30.3, and 26.7, respectively, ORCL's valuation is placed in the middle, it's more expensive than IBM, but cheaper than MSFT and CRM. It is important to remember that each company's valuation reflects its own growth prospects and risks.
In our view, while ORCL presents a mixed picture, we remain cautiously optimistic about its prospects. The company has shown strong revenue growth, an efficient share repurchase strategy, and resilience in maintaining solid EBIT margins. Its outperformance relative to the S&P 500 also cannot be ignored. However, the high valuation relative to its own historical standards and the relatively high capital intensity are areas of concern. Potential investors should weigh these factors carefully before making an investment decision. As always, it is prudent to maintain a diversified portfolio to mitigate risks.
Conclusion
In our analysis of Oracle's FYQ4 earnings call and financial data, it is apparent that Oracle is making significant strides in the AI space. Despite potential GPU capacity constraints, Oracle's strategic AI initiatives, backed by significant contractual commitments from a variety of companies, present a promising growth narrative. However, in the financial realm, while strong revenue growth and impressive EBIT margins speak volumes about Oracle's resilience and effective strategies, the high capital intensity and elevated valuation call for caution.
Oracle's strategy of aligning with the burgeoning AI market and demonstrating successful partnerships reflects an innovative and forward-thinking approach. Despite this, the company's slightly high leverage and the premium valuation might temper immediate upside potential. Potential investors should therefore balance these growth prospects against the associated risks. As we always recommend, maintaining a diversified portfolio is key to managing these risks and ensuring steady returns in a dynamic market environment.
Source: Seeking Alpha
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