Oracle will report its fiscal first-quarter earnings late Tuesday, putting a rally to the test that has seen Oracle stock surge 40% since the start of June. Shares of the database software giant were ahead early Monday after closing last week on a high note.
Oracle's rally this summer to record highs was powered by optimism about AI boosting its cloud infrastructure business, OCI. OCI is a fast-growing challenger to the larger businesses of Amazon and Microsoft that rent cloud computing services to enterprises.
On the stock market today, Oracle stock is up more than 2%, near 238.25 in recent trades. Shares are hovering near Oracle's 21-day and 50-day moving averages following a pullback below those key support levels late last month.
Here's what to watch ahead of Oracle's report tomorrow:
OpenAI-Oracle Cloud Deal
Overall, analysts project Oracle will post a 7% year-over-year increase in adjusted earnings to $1.48 per share, according to FactSet. Sales are projected to rise 13% to $15.01 billion, accelerating from 11% growth and 9% growth in Oracle's two previous quarters.
But investors may be more tuned to the company's commentary than its results.
Shares surged late in June after Oracle disclosed that it had landed a cloud services deal with an unnamed company. That contract could be worth $30 billion in annual revenue by Oracle's fiscal 2028. Analysts and media reports have linked that deal to ChatGPT creator OpenAI. Oracle separately announced in July that it will develop 4.5 gigawatts of data center capacity for OpenAI as an expansion of the broader Stargate AI data center initiative.
Barclays analyst Raimo Lenschow told clients through a research note Monday that the $30 billion cloud deal has raised the stakes ahead of what is typically a "small seasonal quarter" for Oracle. He rates Oracle as overweight, or buy.
"This Q1, investors should pay more attention to the additional commentary from management rather than the quarter itself," Lenschow said. "We expect more details on the contract this quarter regarding the impact on remaining performance obligations (the contract is likely multi-year, which means a $30 billion annual recurring revenue contract could drive RPO up very meaningfully again) but also the capital expenditures needed to be able to deliver the contract."
RPO is a measure of backlogged work. In June, Oracle reported that its RPO grew 41% to $138 billion during its May quarter. The company told analysts at the time that it expects the backlog will more than double during its next fiscal year as well.
Oracle Stock: What Will Oracle's AI Push Cost?
Investors are expecting Oracle to post RPO growth of about 69% for its fiscal Q1, according to Jefferies analyst Brent Thill, who rates Oracle stock a buy.
"We continue to favor Oracle into (fiscal Q1), supported by leading indicators that point to an inflection in OCI revenue and backlog growth over the next few quarters," Thill wrote. "We expect strong headline numbers on backlog growth and guidance, offset by softer software revenue and margins given FQ1 seasonality."
As for OCI, Guggenheim analyst John DiFucci said Wall Street is generally expecting Oracle's cloud infrastructure revenue to increase 56.4% year over year for the quarter.
Cloud infrastructure revenue increased 52% for Oracle's May quarter and 49% for the company's February quarter.
DiFucci, who rates Oracle a buy, said in a client note last week that the setup for the company compared with Wall Street's expectations "looks reasonable for the first time in a few quarters."
Still, Oracle's report comes as investors are debating the sustainability of the market's AI-fueled rally. Oracle stock fell 11% in August.
For Oracle in particular, UBS analyst Karl Keirstead said in a recent note that there are concerns about "margin erosion" as the company scales up spending on data centers to meet cloud demand.
"We share these concerns, but conclude they'll be trumped by the revenue growth acceleration and operating income dollar growth," Keirstead said, reiterating a buy rating for Oracle stock.
Oracle Stock: Consolidation Pattern
Shares have formed a six-week-long consolidation pattern with a buy point at 260.87, according to IBD MarketSurge charts.
Meanwhile, Oracle stock has an IBD Composite Rating of 91 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks typically have a Composite Rating of 90 or better.
Oracle's IBD Relative Strength Rating is 91 out of 99. The RS Rating means that Oracle has outperformed 91% of all stocks in IBD's database over the past year.
