There are investors who believe that the world’s three hyper-scale cloud computing firms – Amazon (AMZN:NASDAQ), Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ) – have that market tied up. Shares believes that Oracle (ORCL:NYSE) has a very good chance of crashing the cloud party, that consensus growth estimates could prove too low, and that the stock – up 60% already this year – has a great chance of shooting beyond the $210 12-month peak price targets of analysts.

Between them, AWS, Azure and Google Cloud have about two-thirds of the global cloud market wrapped up, according to data from Synergy Research, yet Oracle’s ability to work with them presents an enormous opportunity.

Oracle, with a client base that includes Fortune 500 companies as well as governments, remains one of the world’s leading database enterprise companies, and it’s that infrastructure that is crucial, helping solve tricky migration issues for cloud partners.

One of the big challenges it has faced in recent years is, as enterprises embraced cloud solutions, many were bypassing Oracle’s technology. But recent years have seen the company target investment into its own cloud ecosystem, and that’s becoming the fastest growing part of the business.

CLOUD CONTROL

In the most recent quarter to 31 August 2024, overall cloud revenues rose 21% to $5.6 billion, while Oracle Cloud Infrastructure consumption revenues jumped 56% as demand continued to outstrip supply, including winning cloud computing contracts from AI-focused startups and with AWS. That has helped Oracle outrun struggles that have hit other software stocks this year.

AWS, Azure, and Google Cloud, as well as Oracle’s ‘AI-first cloud architecture’ could play a role in helping Oracle support growth, according to Melius analysts, who see those partnerships as a signal that those companies increasingly ‘need to work with Oracle to keep driving their own Cloud segment growth’.

Jefferies analysts said they believe Oracle could be ‘getting its mojo back’ after attending the company’s recent CloudWorld event, where the tech titan said it expects sales to nearly double in the next five years on AI-driven demand for cloud services.

Bernstein called Oracle their ‘top investment idea’ after the event, citing Oracle’s cloud services growth, AI vision, and the shift of its flagship database business to the cloud.

At Oracle’s annual briefing for financial analysts, the company said it expects its revenue will rise to at least $104 billion by fiscal 2029, nearly doubling the $53 billion Oracle reported in June for fiscal 2024.

The company also raised its sales projection for fiscal 2026 to at least $66 billion, up from an earlier $65 billion. This won’t be easy and Citi analysts called the new targets ‘aggressive’ and said Oracle could be ‘reaching for the sky’ with its projections, so there is clearly scope that it could disappoint.

WHAT ABOUT VALUATION?

So, what’s priced in? It can be argued that with a constantly forward-looking market, using one-year metrics for growth, earnings or valuation has limited use. Better to look at trends rather than absolute figures, perhaps better captured by, say, three-year averages, what many fund managers do, including Gerrit Smit, who runs the popular Stonehage Fleming Global Best Ideas Fund (BCLYMF3).

First, the one-year picture. According to consensus data from Koyfin, Oracle is seen growing revenues and EPS (earnings per share) by about 10% and 13% this year to 31 May 2025. It puts the stock on a PE (price to earnings) of roughly 26, or a PEG (price to earnings growth) of 2.0.

The S&P 500 is on a 12-month forward PE of 22.2 and PEG of 1.85. Now let’s look at Oracle’s three-year averages. Again, based on Koyfin data, the stock is trading on a three-year average PE of 22.7 and PEG of 1.57, implying that growth is seen accelerating, drawing the PE down.

This is borne out by consensus forecasts trends. Consensus for fiscal 2025, 2026 and 2027 have increased by roughly 10%, 12% and 14% respectively over the past year as analysts have become more bullish on the growth potential. We believe this estimated upgrade cycle may have further to run, either making the stock cheaper down the line or, more likely in our view, driving the share price to new records.

On our back of notebook calculations, a 10% to 12% increase to 2027 estimates could imply a share price near $250, assuming a similar PE to the current one-year rating. 

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