An AI-driven bubble is forming in Oracle’s (NYSE: ORCL) shares, which is only getting bigger. The FQ4 release highlights a supply-demand situation in which demand outpaces supply, and Oracle invests to meet the need. Demand and budding partnerships with major cloud providers such as Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG) are elevating this company into the pantheon of AI powerhouses, the few companies able to capitalize and monetize AI. Fiscal 2024 was a game-changing year, and 2025 will only be better.
Guidance from CEO Safra Catz is an expectation for revenue growth to accelerate sequentially throughout the year and result in double-digit annual growth. A robust increase in RPO supports guidance. The remaining performance obligation increased by 44% and suggests the business acceleration in 2025 will also be robust.
Oracle Rises on Weak Results
Oracle’s Q4 results were weaker than expected, but two mitigating factors are at play. The first is that analysts set a high bar, so the 200 basis points of top-line underperformance aren’t as bad as they look. The second is the outlook. The company inked major deals with Google and Microsoft to link their clouds. Now, MSFT Azure and Google Cloud users will have access to Oracle’s many products and services to turbocharge (in their words) cloud revenue growth. Among those users is OpenAI, which also signed a contract to use Oracle's cloud to train its ChatGPT LLM.
Oracle’s $14.29 billion in revenue is up 3.3% compared to last year, driven entirely by cloud services and support, which grew by 9%. Cloud License and On-Premise License fell by 14%. Within Cloud Services and Support, the total cloud grew by 20% on a 42% increase in IaaS and a 10% gain in SaaS. Fusion Cloud ERP grew by 14%, and Netsuite Cloud ERP by 19%.
The margin news is mixed but ultimately favorable to investors. The operating margin improved but was offset by increased tax provisions that resulted in a 5% decline in net income. The takeaway is that $1.63 in adjusted earnings is down slightly from last year and missed the consensus but is sufficient to sustain the dividend outlook, balance sheet health, and business reinvestment.
Investors Expect Robust Dividend Growth From Oracle
Oracle is a solid dividend-paying stock with a yield aligned with the broad market average. The difference is that Oracle has been increasing the payout at an above-average pace for years and is expected to continue because the payout ratio is very low at 28%, and earnings are expected to grow. The analysts' consensus for F2025 was strong at 13% before the Q4 report was released, and estimates are now rising, so the company should easily sustain its 15% distribution CAGR.
Balance sheet highlights support the outlook for robust dividend growth. The Q4 highlights include increased cash, receivables and assets compounded by debt reduction. The net result is a 6X increase in shareholder equity and improved corporate leverage.
Analysts Raise Targets for Oracle and Forecast 15% to 30% Upside
Analysts are raising their targets for Oracle stock following the Q4 release, leading it to a new high. MarketBeat.com tracks over a dozen revisions, all upward, and most are above the consensus forecast. The consensus forecast assumes about a 10% upside, while the range of new targets implies a 15% to 30% upside and has lifted the ceiling. Guggenheim set a new high target of $175, which will likely be exceeded over time. Trading at only 20X this year’s and 18X next year’s earnings estimates, it is a value compared to leading blue-chip AI/cloud players.
The technical action is promising. The market is up nearly 8% in premarket trading, setting a new high. If the market follows through on this signal, it should continue to advance. Because the stochastic and MACD indicators show a strong buy signal, the move could gain momentum over the next few days to several weeks, resulting in a melt-up for this stock.
