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Oracle gave a glimpse of the power AI has in its business
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It was a big week for Oracle. After a big sell-off in technology in August, Oracle shares barely finished the month in the green. Last week was another story all together. The stock added 14% on the week and hit a record high on Friday as investors reacted to a strong earnings forecast for fiscal 2026 and beyond. Oracle is now the second best-performing tech stock this year behind Nvidia, up 54% this year. “Oracle has been able to create multiple AI capabilities that simply enhance standard SaaS offerings and make the solution more powerful,” Barclays analyst Raimo Lenschow wrote in a note to clients Thursday. The firm sees the stock “continuing an upward path.” Oracle’s rally is a reminder that the recent rally in tech stocks could open up some opportunities in the software sector. Investors have been waiting for evidence that software companies will benefit from the investments they are making in generative artificial intelligence. It’s one of the reasons software stocks have underperformed the broader tech sector this year. Even with Oracle’s gains, the S&P 500 Software & Services subsector is up just 12% year-to-date, trailing the technology sector’s more than 26% gain in 2024. For the past three years, software stocks have suffered as income growth has moderated. and investors remain skeptical about when it will return. Part of the slowdown is because the shift to the cloud is now in its third decade. But in early 2024, a weaker economy made it even harder to sell software. This macro uncertainty resulted in small and medium-sized companies reducing software spending. Additionally, with the emergence of AI, companies have reallocated funds to prioritize projects in the emerging category. Artificial intelligence can help fuel a new cycle of growth. For perspective, the software industry has a 20-year average growth rate of 40%, but from 2017 to 2024, growth has been below that level. Despite controversy about where industry growth is headed, there are clear signs of momentum at Oracle, Microsoft and SAP, analysts say. It is no coincidence that the best performers are legacy firms that dominate market share. These software giants have deep roots in the market and are showing early signs of capitalizing on the AI wave. Plus, their deeper pockets allow them to invest in and expand new products regardless of interest rates or financing dynamics, further strengthening their market dominance. Oracle “Over the past 20 years the software industry has matured,” said Pat Walravens, head of technology research at Citizens JMP in an interview with CNBC. That means investors “are looking for companies that have a product cycle that is helping to accelerate growth,” he explained. For Oracle, that’s its cloud infrastructure — a service that has enhanced Oracle’s fundamental growth story, Walravens argued. “For the first time in a dozen years, you’re looking at organic growth returning to double digits,” Walravens said, highlighting one of the key takeaways from its fiscal first-quarter earnings on Monday. That’s what has helped Oracle become a strategic cloud services provider in the same category as Amazon, Google and Microsoft, he explained, calling Oracle stock a buy, even with recent gains. The investor day that followed the earnings report only served to make Wall Street confident about its growth trajectory. Oracle raised its 2026 revenue target to $66 billion, up slightly from its previous forecast of $65 billion, but what surprised investors were its ambitious goals for 2029. The company set a revenue target of $104 billion by 2029, suggesting a compound annual growth rate of 16% from 2026 to 2029, much higher than the 9% expected. Oracle also forecast 20% annual growth in non-GAAP earnings per share through 2029. Bernstein analyst Mark Moerdler, who called the stock his top investment idea, raised his price target to $201 , or 24% above the stock’s closing price of $162.03 on Friday. . He told CNBC that Oracle “is growing significantly faster than their peers in that market space.” “They built things that are very different,” he said, noting that Oracle’s AI-driven infrastructure and platform innovations are not being fully appreciated in the stock by investors. Oracle is more resistant to the software industry slowdown because of its early investment in GPU infrastructure — the hardware and software that supports the use of graphics processing units in the cloud computing demanded by its customers. This strategic move positioned Oracle as a key player in AI, fueling growth in its infrastructure as a service (IaaS) business. “What Oracle did really well is they saw where the puck was going to be and they skated to it,” Walravens said. Oracle’s proactive approach led to major contracts including reaching multi-billion dollar deals with companies like OpenAI. That boosted Oracle’s contract values, with bookings reaching $99 billion in the quarter ended Aug. 31 — up 53% from a year ago, an acceleration from the previous quarter’s 44% year-over-year increase year. ORCL Mountain YTD Performance YTD ORCL. Oracle Cloud Infrastructure is central to this growth, providing a range of services for AI-driven workloads. Demand for OCI continues to grow, with a growing pipeline, which is why the company expects capital expenditures to double by fiscal year 2025 to support AI-driven cloud capacity. Microsoft Microsoft, the world’s largest software developer, stands out for its strategic positioning and significant AI investments. Its dominance across all layers of the cloud stack—applications, infrastructure, and platforms—positions it as a leader in the future of AI-driven software. Goldman Sachs called Microsoft “one of the most compelling investment opportunities in the technology industry,” in a note following the software giant’s fiscal fourth-quarter results. The bank highlighted Microsoft’s strong presence in the cloud, which expands the share within customers’ IT budgets. Microsoft’s competitive advantage is most evident in its Azure cloud platform, which integrates AI to help businesses manage their applications efficiently. Azure’s success is driven by the AI capabilities embedded in products like M365 Co-Pilot and Azure AI Services, attracting more businesses to Microsoft’s cloud. Azure now boasts 60,000 AI customers, up 60% year-over-year since the fourth quarter. MSFT Mountain YTD Performance Year-to-date MSFT. Microsoft’s AI monetization is progressing with Azure AI Services hitting an annualized revenue rate of $5 billion in the second quarter and contributing 30% of growth. GitHub, Microsoft’s AI-powered developer tool, is at a $2 billion revenue rate, with 40% driven by Co-Pilot. Goldman Sachs estimates that the cloud business could reach roughly $230 billion by fiscal 2027 and should deliver “a potential double in earnings per share” from fiscal 2024 to 2028. To keep up with demand for AI, Microsoft is spending billions to expand its data center infrastructure. Microsoft’s strong cash position and safe balance sheet enable it to continue spending on cloud and AI infrastructure without hurting its financial performance. CFO Amy Hood said Azure’s growth should accelerate in the second half, “as our capital investments create an increase in available AI capacity to serve more of the growing demand.” If that happens, the stock, which is up more than 14% year-to-date, should benefit. The vast majority of Wall Street analysts rate Microsoft shares a buy, with an average target price of $498.17, according to FactSet. The target implies about 16% upside from Friday’s close. SAP Another company challenging the broader software slowdown is SAP. The German company is capitalizing on the popularity of S/4HANA, the latest iteration of its enterprise resource planning (ERP) software used by companies to help run and manage their day-to-day operations. S/4HANA has been successful because it is a ready-to-run ERP that incorporates industry best practices and global regulatory content. When SAP reported its second-quarter results on July 22, cloud revenue rose 25% year over year, driven by a 33% increase from its cloud ERP business. This marked the tenth consecutive quarter of over 30% growth for cloud ERP, SAP said. AI is playing a key role in driving the division’s earnings. According to management, about 20% of deals for the quarter involved premium AI use cases. Year-to-date YTD mountain SAP stock performance. Momentum should continue as cloud backlog is up 28% from last year. With this visibility, management said it is on track to achieve its fiscal 2025 ambitions. BMO analyst Keith Bachman expects SAP shares to reach $248 over the next year. That’s just slightly above Wall Street’s average price target of $244.20. Eighty percent of analysts rate SAP shares a buy, per FactSet. Shares are up 43% year-to-date. Bachman sees SAP’s high customer retention rates as an advantage and expects the company’s improving cloud capabilities to be a catalyst for the stock. He also expects that his AI offerings will drive more customers to the cloud because it will increase efficiency. In July, the analyst predicted that its AI would “contribute modestly to revenue,” with a more significant impact in fiscal 2025.
