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Oracle cloud business growing while other units shrink
Introduction
Shares of Oracle (ticker symbol: ORCL) are experiencing a significant drop of 7% this morning after the company's fiscal second-quarter earnings report fell short of Wall Street's expectations. Gil Lura, Senior Software Analyst at Da Davidson, remains neutral on Oracle, maintaining a price target of $ 150.
Oracle has been promising to accelerate toward double-digit revenue growth for some time, yet the company again reported single-digit growth. This mixed performance is particularly noteworthy since about 60% of Oracle's business is still in decline. While their cloud business is growing rapidly, the transition to cloud services has not accelerated as expected.
One notable aspect of Oracle's current strategy is its significant increase in capital expenditures (capex), which are set to double this year. Capex is expected to hit more than 25% of revenue, indicating very high investments that have not yet resulted in revenue acceleration. Oracle's focus on building out data centers is essential for future growth, particularly as major tech players, including Meta, Google, Amazon, and Microsoft, face challenges in expanding their infrastructure.
While Oracle has secured substantial deals with these hyperscalers, concerns remain about long-term sustainability. As data centers are completed, there might be diminished demand for Oracle's services from these players.
The discussion also touched on expectations around the company's capital investments. Analysts are cautious, noting that building out data centers is complex and time-consuming. The current bottleneck in site selection and energy sourcing presents significant hurdles. The excitement surrounding alternative energy sources, such as small modular reactors, may take years to materialize and won’t alleviate current energy demands in the short term.
Additionally, Oracle faces potential challenges related to its relationship with TikTok. While the company hasn't quantified TikTok's business, it could be one of Oracle's largest customers within its cloud division. Should TikTok face a ban in the U.S., there could be a significant impact on Oracle’s revenue stream.
Despite the anticipation around artificial intelligence (AI) and "agent" technology, Gil Lura describes much of the current discourse as marketing jargon. Although promising, these tools still seem far from full automation and may not yet be widely accepted within most corporate environments.
Looking ahead, analysts are watching closely for results from Adobe and Broadcom later in the week. Expectations for Adobe are manageable, provided they maintain their growth trajectory. Meanwhile, Broadcom stands to benefit from the data center buildout due to custom chips created by companies like Amazon and Google, further fueling demand in this sector.
Keywords
- Oracle
- Cloud business
- Revenue growth
- Capital expenditures
- Data centers
- TikTok
- AI technology
FAQ
Q: Why did Oracle's stock drop after their earnings report?
A: Oracle's recent fiscal second-quarter earnings fell short of Wall Street's expectations, leading to a 7% decline in shares.
Q: Is Oracle's cloud business growing?
A: Yes, Oracle’s cloud business is growing rapidly, but the overall revenue growth remains in single digits due to other declining segments.
Q: What is Oracle's current capex strategy?
A: Oracle is set to double its capital expenditures this year, with plans for more than 25% of revenue allocated to capex in order to expand its data center capabilities.
Q: How could TikTok's situation impact Oracle?
A: TikTok may be one of Oracle's largest customers in the cloud business. If TikTok were to face a ban in the U.S., it could result in a significant revenue loss for Oracle.
Q: What is the outlook for upcoming reports from Adobe and Broadcom?
A: Analysts expect Adobe to meet manageable expectations for growth, while Broadcom is anticipated to benefit from a surging demand for data center infrastructure.