Is Oracle Stock a Buy Amid Cloud Wars and Valuation Concerns?

Before investing in Oracle (NYSE:ORCL) stock, it is essential to analyze varying viewpoints in order to soundly decide. Oracle is one of the major companies in the cloud computing and software for enterprise markets. 

The financial performance of Oracle has been good with strong revenues and earnings. It has also paid great attention to the cloud services and enterprise software solutions as its main business strategies. The price targets set by the analysts paint a positive picture for Oracle stock with the shares possibly rising by 5% to 6%.

However, Oracle is a direct cloud rival to Amazon (NASDAQ:AMZN) Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).

So, investors should ask themselves this question. Is Oracle stock a good value right now?

I personally believe that it’s a hold. But, I will also explore alternative points of view as I believe its valuation is not so straightforward.

Why ORCL is a Hold

I have come up with a recommendation of hold for the stock. Recent financial performances are good with Q1 revenue up 9% to $12.5 billion. And cloud services revenue grew by 30%. Yet, I’m concerned about some underlying issues.

Within a highly competitive market, Oracle’s 66% growth in the infrastructure services is impressive. But it still has Amazon Web Service (AWS), Microsoft Azure, and Google Cloud ahead of them. It concerns me most about their failed $10 billion deal with xAI which makes me question their ability to land and retain major clients in this space.

The company’s insiders are selling their stakes, with many prominent insiders selling their shares over the last twelve months. This makes me worry if there are some things that we are not aware of about the company.

Furthermore, Oracle stock’s valuation gives me some concern. At a P/E of about 36x earnings, one has to suspect that a lot of positive expectation is being reflected in the share price. However, while their cloud transition is progressing, I’m not convinced it justifies this premium yet.

Cloud and AI Transition Turbulence

Several potential issues are at hand along with its many positives. Thus, based on the analysis of the company’s position, one could recommend selling Oracle stock.

While the most recent artificial intelligence (AI) deals made by Oracle are substantial, I believe in an inevitable general stagnation of the AI industry that could subsequently affect the growth of Oracle. 

The AI revolution is booming. However, it’s crucial to note that we are working from the lowest baseline possible since it is brand new technology. Incremental growth then looks like giant leaps forward, and its growth is expected to slow down exponentially as time progresses. If CPU and GPU development is reflective of the trajectory of the AI market, due to the failure of Moore’s law, an inflection point will be reached. Then, diminishing returns will start to kick in, making each iteration and improvement of AI models comparatively less impressive and powerful. 

Of course, this is more a broader criticism of the AI industry as a whole. But I think if investors were banking on Oracle to be a “picks and shovels” stock to enable pipedreams like artificial general intelligence (AGI) in the near future, then they might be sorely disappointed with our slow, realistic progress.

Concepts like AGI are either going to come within reach during the next few years or not at all. Yet, no evidence suggest we’re even close to it.

Cloud Dominance and AI Synergy

Despite market inability to hold rational expectations for potential, overall disruption, Oracle’s current focus on AI and cloud infrastructure is a prime reason to invest.

Some of the strategic partnerships that the company has made, especially with OpenAI, make it a tactical play in the AI revolution. Oracle reports a 30% increase in the company’s cloud services revenues. And the infrastructure services revenue increases at an even higher rate of 66% annually. This trend is expected to continue as management estimates mid teen revenue growth for fiscal year 2025. 

The core business gives a steady cash flow, and the cloud and AI business lines provide much room for growth. 

However, I still think that Oracle stock is a hold. The cloud and AI industries are now one and the same, with AI being a major predicted growth driver. More evidence and progress are needed in order to definitively rule on the impact upon society.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.