Oracle’s cloud segment growth slows despite AI boost

Oracle Corporation (NYSE: NYSE:), a multinational computer technology corporation, has recently seen a dip in its stock value following an earnings report that fell short of investor expectations. This comes after a substantial rise in share price a few months prior, which led to co-founder Larry Ellison surpassing Bill Gates on the list of the world’s richest people.

Despite this setback, Oracle’s cloud segment continues to perform well, bolstered by the early adoption of Nvidia’s (NASDAQ: NASDAQ:) latest artificial intelligence (AI) technology. Oracle Cloud, which was launched in 2016, has been steadily gaining traction in the market dominated by Amazon (NASDAQ:)’s AWS, Microsoft (NASDAQ:)’s Azure, and Alphabet (NASDAQ:)’s Google Cloud.

A significant factor contributing to Oracle Cloud’s success was securing an early deal to acquire Nvidia’s latest generative AI servers last autumn. Oracle followed this up by being the first to launch Nvidia’s DGX Cloud AI training subscription service in March 2023.

Larry Ellison, who was initially a critic of cloud technology, has now embraced it fully. In a recent earnings call, he revealed that AI development companies have signed contracts to purchase more than $4 billion of AI training capacity in Oracle’s Generation2 Cloud. Among these companies is Elon Musk’s new startup xAI.

Despite having an annualized revenue about half that of Google Cloud, Oracle Cloud posted the fastest growth rate among public cloud computing platforms in its fiscal 2024 first quarter (ended in August 2023). However, this rapid progress in cloud computing is somewhat offset by other older software business lines. Overall revenue increased only 9% to $12.5 billion last quarter.

Nevertheless, earnings per share (EPS) showed a notable increase of 54% year over year to $0.86, and free cash flow increased 21% to $5.66 billion. While management remains confident about the high-growth mode of its cloud infrastructure in the year ahead, some investors were disappointed by the lack of a significant boost from Nvidia AI.

Oracle’s second quarter of the current fiscal year (which ends in November) is expected to bring total revenue growth of just 5% to 7%, including a small boost from favorable currency exchange rates. Cloud-specific revenue is expected to rise 29% to 31% next quarter, accounting for all of Oracle’s expansion and offsetting weakness in its older software lines.

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