Oracle’s stock experienced a decline on Tuesday as investors processed the software company’s decelerating cloud growth. Despite Wall Street analysts’ skepticism surrounding Oracle’s ability to effectively compete with larger rivals in the data-center infrastructure space, questions still persist regarding the payoff of its efforts.
Significant Pre-Market Drop
In premarket trading, Oracle’s stock dropped by 8.5%, reaching a value of $105.31, subsequent to the release of its fiscal second-quarter results on Monday evening.
Cloud Revenue Growth
According to analysts, Oracle’s cloud revenue growth of 25% (a decrease from 29% in the previous quarter) generally aligned with their expectations. However, concerns remain about the company’s strategy for future acceleration. Citing high demand that surpasses its current capacity, Oracle plans to construct an additional 100 data centers for its Oracle Cloud Infrastructure businesses.
Oracle believes it can build smaller and more cost-effective data centers when compared to market leaders such as Amazon.com, Microsoft, and Google’s parent company, Alphabet. Nevertheless, this endeavor remains a potentially expensive investment as Oracle continues to integrate electronic health records company Cerner, which was acquired in 2022.
Analyst Gil Luria from D.A. Davidson expressed doubts about sustaining high single-digit growth due to the challenges involved in integrating Cerner and the growing competition in the data center market. Luria maintains a Neutral rating on Oracle stock with a $105 price target.
Oracle’s Strategy and Future Outlook
Oracle is banking on the increased demand for cloud computing driven by the growth of artificial intelligence (AI) technology to validate its strategic moves.
While acknowledging solid demand momentum in Oracle Cloud Infrastructure (OCI) business, William Blair analyst Sebastien Naji believes the stock’s current valuation already assumes revenue acceleration and the tailwinds of AI generation. Naji maintains a Market Perform rating on the stock without assigning a target price.
