Oracle's Stock Surges 62% in 2024: A Key Player in the AI Boom. Is its Valuation Sustainable?

Tesla is a company that has changed the fates of countless people. Since its listing in 2010, its stock has increased by 335 times in about 15 years.

However, there is a company that has outperformed Tesla. From 1986 to 2000, in about 15 years, its stock rose by 624 times.That company is Oracle!

This is also one of my personal favorite companies. I bought its stocks this year. Well, we'll talk about the trading later. Now, let's first take a look at why the company's stock price has been surging this year.

The Cornerstone of the AI Wave

When it comes to Oracle's rise in recent years, AI is an inevitable topic.

This is the charm of an industry with huge prospects. It often gives birth to many unicorns.

Oracle is in an advantageous position in the artificial intelligence wave because it is becoming the core of the artificial intelligence ecosystem (mainly as a provider or recorder).

In the traditional database market, they are already the record provider. Now the same is true in the field of artificial intelligence.

For companies focused on AI, Oracle is developing into an important provider of the basic layer, etc. Oracle's technology plays a fundamental role in these companies, just as GPUs are crucial to AI.

Just two weeks ago, Oracle signed an AI training agreement with Meta. The latter will use Oracle Cloud to enhance the training and deployment of various AI projects such as the Llama large language model. In June, OpenAI also said it would use Oracle's cloud infrastructure.

Last year, Ellison visited the Microsoft headquarters for the first time and announced a partnership, enabling users to use Oracle's database through the Microsoft Azure cloud platform. This year, Oracle has reached similar agreements with Google and Amazon, and also has a high - value AI deal with Musk's X.ai.

Ellison once said, "Oracle's cloud infrastructure has trained some of the world's most important generative AI models because we are faster and cheaper than other cloud platforms. The AI models and AI agents trained by Oracle will increase the speed of global scientific discovery, economic development, and corporate growth. The scale of the opportunities is unimaginable."

Can the Valuation Support the Surging Share Price?

Before starting this part, let me tell an interesting story.

In 2020, the Trump administration at that time claimed that because Chinese companies owned TikTok, they believed that China might force TikTok to hand over user data, potentially using it to spy on American citizens, making the app a threat to national security.

So the US government tried to force the acquisition of TikTok.At that time, the companies bidding for TikTok included Microsoft, Walmart, and Oracle.

Yes, I was also involved in the deal at that time... I guessed that the final winner would be Microsoft, so I bought a large number of Microsoft stocks at that time.

Because according to my information at that time, ByteDance had initially started negotiations with Microsoft and signed a non - binding "letter of intent", intending to let Microsoft take over TikTok's US business.

However, later, some of ByteDance's US shareholders, such as Sequoia Capital and General Atlantic, supported Oracle to compete for TikTok.

Although the final acquisition agreements were not reached, I was wrong after all because Oracle still became the biggest winner.

In the end, TikTok chose Oracle as its cloud and storage service provider in the US.

Considering the scale of Oracle's cloud service business at that time, ByteDance's choice really surprised many people.

However, with ByteDance's entry, Oracle's cloud business and stock price entered a period of takeoff. You can take a look at the following stock price chart.

Ok, I digressed. Let's get back to Oracle's current valuation.

Let's look at Oracle's revenue, profit, and cash - flow growth over the past three years.

We can find that Oracle is not a company like Nvidia, whose revenue and profit have repeatedly reached new highs. Its growth mainly relies on valuation increases.

The following is the PS multiple of Oracle over the past five years. From the lowest point of 3.2 times in 2020, it has risen to 8.75 times currently.

The PS valuation has increased by 2.73 times, and the stock price of Oracle has increased by 2.55 times over the past five years. So, Oracle's rise mainly depends on the increase in valuation.

At the same time, in order to promote the growth of cloud computing, they plan to double their capital expenditure in 2025. In fact, they themselves seem to be very optimistic about the acceleration of growth in 2025 and 2026:

Let's estimate based on the above chart again: PEG non - GAAP FWD = 2.45, which is about 35% higher than the 5 - year average (1.81).

So currently, it is clearly in a relatively overvalued position.

Personally, I feel that with an income growth rate of less than 20% currently, it is difficult for Oracle to support its current relatively high valuation.

Of course, as I said, under the AI wave, valuation becomes less accurate. We need to observe the quarterly impact of AI on the company's business.

To quote a sentence from an article I've read: Artificial intelligence is like the Wild West or a gold rush. But one thing seems to be becoming more and more certain: Just like GPU manufacturers, Oracle is selling pickaxes to AI companies.