Shares of Oracle (NYSE: ORCL) have been in red-hot form on the stock market in 2024, rising 56% as of this writing. Investors have been buying shares of this database software provider hand over fist thanks to its improving credentials in the artificial intelligence (AI) market.
The company's recent results have been solid, and Oracle is set to report double-digit revenue growth in the current fiscal year. Its revenue pipeline is growing at an incredible pace thanks to the robust demand for its cloud infrastructure solutions.
It is also worth noting that Oracle recently held a financial analyst meeting on Sept. 12, and a closer look at management's long-term predictions indicates this cloud company could be well on its way to attaining a trillion-dollar valuation within the next five years.
Here are some reasons why Oracle is likely to become a trillion-dollar company.
Oracle is going all out after the cloud AI market
Oracle currently has a market capitalization of $455 billion, which means it needs to jump another 120% to enter the trillion-dollar club. The stock could easily appreciate this much because demand for its cloud infrastructure from customers looking to train and deploy AI applications has gone through the roof.
In fiscal 2024 (which ended on May 31), Oracle's cloud infrastructure revenue shot up 51% year over year and outpaced the 6% growth in its overall revenue. When Oracle released its fiscal Q4 results in June, the company pointed out that it is witnessing "enormous demand for training AI large language models in the Oracle Cloud." This strong demand led to a 44% year-over-year increase in Oracle's remaining performance obligations (RPO) in Q4 to $98 billion.
When Oracle released its Q1 results for fiscal 2025 earlier this month, it reported a stronger year-over-year increase of 53% in its RPO to a record $99 billion. RPO refers to the total value of a company's future contracts, so the terrific growth in this metric is good news for Oracle investors, suggesting the company's revenue pipeline is getting better.
It is also worth noting that Oracle witnessed a 162% increase in cloud AI customers in the first quarter of fiscal 2025, and the company increased its AI infrastructure capacity by a whopping 258%.
Chairman Larry Ellison remarked on the company's latest earnings conference call:
Oracle has 162 cloud data centers, live and under construction throughout the world. The largest of these data centers is 800 megawatts, and it will contain acres of Nvidia GP clusters able to train the world's largest AI models. That's what's required to stay competitive in the race to build one, just one of the most powerful artificial neural networks in the world.
The stakes are high and the race goes on. Soon Oracle will begin construction of data centers that are more than a gigawatt.
Clearly, Oracle is looking to go all out to capitalize on the fast-growing demand for AI services in the cloud. Goldman Sachs estimates generative AI could drive $200 billion to $300 billion in cloud spending by the end of the decade, which explains why Oracle is now looking to boost its capital expenditure to capture a bigger share of the end-market opportunity on offer.
The company has planned a capital expenditure of $15 billion for the current fiscal year, which would be more than double its $7 billion in capital expenditures in the previous fiscal year. Oracle says it is building cloud capacity so that it can convert its bookings into revenue and profits at a faster pace, and this probably explains why the company has set an ambitious long-term revenue and earnings growth target.
Why a trillion-dollar market cap looks like a possibility
Oracle expects its revenue to nearly double over the next five years. Specifically, the company is anticipating at least $104 billion in revenue in fiscal 2029 from $53 billion in fiscal 2024. Additionally, management is forecasting annual growth of at least 20% in its earnings per share during this period. For comparison, Oracle's earnings per share have increased at an annual rate of just under 10% for the past five years.
Oracle ended fiscal 2024 with earnings of $5.56 per share. Based on that number, its bottom line could jump to $13.84 per share after five years. Multiplying the projected earnings with the Nasdaq-100 index's forward earnings multiple of 29 (using the index as a proxy for tech stocks) points toward a stock price of $401 after five years. That would be a 144% jump from current levels, which would be enough to send Oracle into the trillion-dollar club.
With shares of the company currently trading at 27 times forward earnings, investors are getting a good deal on this AI stock, which they wouldn't want to miss out on considering the substantial upside it could deliver in the long run.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
Prediction: This Unstoppable Stock Could Join the Trillion-Dollar Club in the Next 5 Years was originally published by The Motley Fool