Under the Spotlight Wall St: Oracle (ORCL)

Oracle ($ORCL) founder Larry Ellison has decided it’s better to have frenemies than enemies, partnering with Amazon despite trash talking its cloud offering for years.

This means the big three cloud providers, including Google ($GOOG) and Microsoft ($MSFT), are now Oracle partners. It shows how its database services are indispensable for customers demanding speed and security as cloud computing and AI grow. 

Working with the big cloud platforms is set to help accelerate earnings over the next five years. That’s reflected in the 59% rally in Oracle shares this year, catapulting 80-year-old Ellison, who founded the company in 1977, to the position of world’s fifth richest person.

Wisdom of the clouds

Ellison sees these deals as key to success in the next era of cloud computing, one built on multi-cloud partnerships. 

Cloud computing has defined how modern companies manage data. Moving away from on-premises storage, clients store their data on servers in off-site locations, hosted by third-party providers. This saves money and allows easy expansion or reduction in data storage needs. 

But the problem is these clouds don’t work well together. There are infrastructure clouds like Amazon Web Services (AWS), Microsoft’s Azure, Google Cloud Platform and Oracle. There are also application clouds like Salesforce ($CRM), Workday ($WDAY) and… Oracle. 'They’re not gracefully integrated,' Ellison lamented at Oracle CloudWorld earlier this month.

Oracle’s most recent partnership with Amazon highlights how it’s tackling the integration problem and meeting demands for more bandwidth and faster speeds. 

U.S. electronics retailer Best Buy ($BBY), for example, hosts e-commerce applications on AWS, but its core workload database is on Oracle. The solution? Embed Oracle cloud infrastructure (OCI) – including its hardware – in AWS data centres. This allows for faster data processing. Other large companies that may benefit from the partnership include Fidelity, State Street ($STT) and Vodafone ($VOD). 

Rebooting growth

Oracle has been viewed as a laggard in cloud, running well behind the big three despite building its own data centres and offering a suite of products and services. But its multi-cloud offering – allowing customers to integrate their structured data from Oracle relational databases into partner clouds – should lift its earnings with the expected growth in cloud and AI. Oracle has attracted 11,000 new cloud customers in FY24, to a total of 80,000+. 

First quarter revenue was US$13.3b, up 8%. Growing demand for Oracle’s cloud services made this its largest business, with a 22% increase in revenue to US$5.6b. It also drove a 52% year-on-year increase in remaining performance obligations – a measure of deferred revenue and backlog – to US$99b. 

Oracle forecasts this will translate to 10% revenue growth to US$58b in FY25, and has lifted its FY26 guidance to US$66b from US$65b. But it’s the medium-term forecasts that caught the analysts’ attention. FY29 revenue is pegged above US$104b, and EPS is expected to grow at a 20% rate or more between FY26 and FY29.

Big bucks

Meeting customer demand growth comes with a hefty price tag. Oracle will spend US$15b on capex in FY25, more than double the US$7b spent in FY24.  

It continues to build its own data centres – clients include OpenAI and Nvidia. Oracle’s megawatts under management has grown 4x since FY20 and the largest centre they operate is 800 megawatts. Ellison foresees 1-gigawatt centres and has proposed the use of small modular nuclear reactors to power the next generation of mega data centres.  

The company continues to market its cloud platform as a cheaper alternative. It’s appealing to customers considering a move to the cloud. Oracle calculates that moving its remaining on-premise support base could deliver incremental recurring revenue of US$20b for applications and US$65b on infrastructure.  

Fast lane

Oracle’s share price has rallied 20% since 9 September when its Q1 earnings dropped. A pull-back in the stock wouldn't surprise. But if Larry Ellison gets his way after putting rivalries aside, investors who stick around for a few years might just end up on cloud nine. 

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