After Beating Expectations in Q1, Is Oracle Stock Due to Rally Higher?
Key Points
Oracle's revenue rose by 30% in its most recent quarter, as its cloud business is booming.
Investors remain concerned about its debt load, however, as interest expenses rose 55% year over year.
Its valuation is modest in relation to the average S&P 500 stock, but for investors, it may come down to whether there's enough margin of safety.
Oracle (NYSE:ORCL)'s stock was a hot buy not that long ago. It soared 58% in 2024 as hype around the tech company grew, driven by its importance to the growth opportunities related to artificial intelligence (AI). But over about two years, the stock has gone from boom to bust -- now back to around the levels it was at in September 2024.
Recently, however, the tech company may have given investors a reason to remain bullish, as it posted some strong quarterly earnings numbers. With a high growth rate and a reduced valuation, could Oracle's stock be overdue for a rally?
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Oracle's revenue soared 30% in Q1, but interest expenses surged higher
The database company is off to a strong start to its 2027 fiscal year, with its first-quarter revenue rising by 30% to $19.3 billion for the period ending Aug. 31, which beat analyst expectations. The big catalyst was its cloud business, where revenue soared a whopping 62% and totaled $11.6 billion. Its cloud infrastructure business experienced 121% growth as more companies migrate their operations to the cloud, and, with Oracle being a trusted name, it has benefited enormously.
The tech stock, however, isn't soaring on the results. Investors have been concerned about its high debt load, and that is evident with its high interest costs, which totaled $1.4 billion for the period, representing a year-over-year increase of 55%. Between a high debt load and significant exposure to OpenAI, which investors are growing more concerned about these days amid questions about its prospects for profitability, Oracle may simply not be doing enough to calm fears about its business. While investors may recognize that the business is doing well today, there is a nagging concern about what might happen in the future, as interest rates rise and OpenAI faces more competition.
The stock isn't expensive, but it's still a risky option
In just 12 months, Oracle's stock has lost about half of its value. It's a steep decline, effectively giving back the gains it had generated due to the AI hype; its share price is now right around the level it was at about two years ago.
Oracle's stock is trading at about 23 times its trailing profits, which is right in line with the S&P 500 average. While it may look cheaper these days, it may still not offer investors enough margin of safety to offset the risks associated with its high debt load and exposure to OpenAI.
I'd wait for a lower stock price before considering Oracle, because while the business is doing well today, there are still plenty of question marks about its future, making it a less-than-ideal investment right now, even at a reduced valuation.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.