Could Oracle Be the Next Microsoft?

microsoft‘S (MSFT -0.17%) The stock has soared nearly 1,000% over the past decade, turning it into the world’s most valuable company with a market capitalization of $3.2 trillion. This tremendous growth comes as its mobile, cloud and AI ecosystems expand under Satya Nadella, who became the company’s CEO in 2014.

Microsoft remains one of the best AI stocks on the market, but investors are probably already looking for the next big tech stock that can replicate those gains over the next decade. Does that company do that? trust (ORCL 0.27%)The cloud and AI ecosystem is also gradually expanding, but with a smaller market capitalization of $350 billion?

Image source: Getty Images.

Similarities and Differences

Microsoft and Oracle operate different business models. Microsoft is a more diversified company and generates most of its revenue from its Windows operating system, Office productivity software, Azure cloud-based infrastructure platform, and other cloud-based services. It also sells advertising for its Bing search engine, PC hardware through its Surface division, and video game products through its Xbox division.

Much of Microsoft’s growth over the past decade has come from the transformation of its Azure and Office products and Dynamics customer relationship management (CRM) platform into cloud-based services. Additionally, our investment in OpenAI allowed us to integrate the startup’s generative AI tools into our own cloud-based ecosystem.

Oracle is one of the world’s leading database software companies. Although we initially established an early mover advantage with on-premise applications, Amazon Microsoft led the way with its own cloud-based database service. To keep pace with these changes, Oracle has converted its on-premises applications to cloud-based services and expanded its ecosystem inorganically with more enterprise resource planning (ERP), CRM, and healthcare IT management services. We also launched our own cloud platform, Oracle Cloud Infrastructure (OCI).

Oracle currently ranks third in the cloud-based database software market behind Amazon and Microsoft, while OCI is still a small platform compared to Amazon Web Services (AWS), Microsoft Azure, and Microsoft Azure. alphabetof Google Cloud. 3rd place in CRM market sales And Microsoft remains a big underdog in the fragmented ERP market. This is probably why Oracle is not often mentioned along with Microsoft or Amazon.

Oracle is still expanding its cloud and AI businesses.

Oracle generated 38% of its revenue from overall cloud services in its most recent quarter. By comparison, Microsoft generated 54% of its revenue from cloud services last quarter.

Oracle plans to continue expanding its cloud business to offset slower growth in its on-premises, licensing, and support segments. Increased utilization of back-office databases and ERP applications, OCI growth, and new AI infrastructure contracts are expected. nvidia It’s about pushing that expansion and widening the moat.

In a recent earnings report, CEO Safra Catz said Oracle is “reserving cloud infrastructure capacity because demand for Gen2 AI infrastructure significantly exceeds supply, even as we open new cloud data centers and significantly expand existing cloud data centers.” “We expected to continue receiving large contracts,” he said. Rapidly.”

But can Oracle replicate Microsoft’s gains?

That means Oracle should benefit from the expanding AI market, which Grand View Research predicts will grow at a compound annual growth rate (CAGR) of 37% from 2023 to 2030. However, much of these gains will still be offset by: Slow-growing legacy business.

Analysts expect Oracle’s revenue to grow at a CAGR of 8% from fiscal 2023 (which ended last May) to fiscal 2026, with its EPS growing at a 22% CAGR. Much of the revenue growth is likely to be driven by large share buybacks. It has already repurchased 38% of its shares over the past decade, and should maintain this tradition for the foreseeable future.

These growth rates, while stable, will not transform Oracle into the next Microsoft. From fiscal 2013 to fiscal 2023 (which ended last June), Microsoft grew revenue at a CAGR of 11% as EPS grew at a CAGR of 14%. Analysts expect revenue and EPS to grow at a CAGR of 15% and 17% from fiscal 2023 to fiscal 2026 as the company continues to expand its cloud and AI ecosystem.

Assuming that Oracle meets analyst expectations over the next three years, continues to grow EPS at a 20% CAGR from fiscal 2026 to fiscal 2033, and trades at 20 times earnings, Oracle’s stock price will be $400 per share. It could rise more than double. The market capitalization is approximately $1.1 trillion. That would be an impressive profit in a decade, but it wouldn’t compare to Microsoft’s meteoric rise over the past decade. It will also still be much smaller than Microsoft is today.

So instead of wondering whether Oracle will shake off its reputation as a dusty old tech stock and become the next Microsoft, investors should focus on Oracle’s core strengths. It’s providing shareholders with plenty of cash, and the stock is still reasonably valued.