Cloud revenue surpassed revenue from licensing and support services operations in the most recent quarter.
Like other tech companies, Oracle (ORCL 0.28%) has its eye on the artificial intelligence (AI) brass ring. But how can a company with a mere 2% share of the cloud services market hope to compete against giants like Amazon and Microsoft?
The answer can be found in the timing of Oracle’s entry into the market and its strategy for providing unique AI cloud solutions.
Oracle’s entry into the cloud services market is auspicious
Oracle’s cloud computing growth aspirations coincide with the onset of a radical, transformative technology that will upend the traditional cloud services market. Because of the tremendous resources AI requires and the unprecedented demand it will generate from businesses of all sizes, the advent of AI has dramatically accelerated growth opportunities for all cloud providers.
According to Grand View Research, the size of the AI cloud market was valued at $45 billion in 2022 and is estimated to grow at a compound annual growth rate of 39.6% from 2023 to 2030.
As a newcomer to the market with strong customer interest in the variety of its offerings, Oracle is in the enviable position of being able to ride the crest of the AI wave. For the company’s third quarter (ended Feb. 29), revenue from its new Gen2 AI cloud platform surged an astonishing 53%.
Enterprise customers will demand tailored AI cloud solutions
Because AI is a disruptive technology, a one-size-fits-all cloud solutions environment dominated by a few providers no longer meets the needs of diverse businesses with dissimilar AI cloud requirements.
The optimal AI solution for some companies might be best achieved by using multiple cloud providers; other businesses may find a hybrid cloud buildout is more appropriate. This type of cloud configuration allows some software functions to remain on their own data centers while migrating other critical applications to the cloud.
These are precisely the types of flexible, innovative, customized AI cloud configurations that Oracle has been deploying for its enterprise customers.
Oracle’s joint ventures enhance the flexibility of its AI cloud offerings
The company’s recent partnership with Microsoft allows its customers to access Oracle database programs running on its cloud infrastructure yet deployed in Microsoft’s Azure data centers. Oracle doesn’t care whether some customers use other cloud providers if the company stands to gain in some way, for example, awareness of Oracle’ s AI and cloud database capabilities.
Similarly, the company’s venture with Nvidia enhances the appeal of its cloud computing platform, as Oracle’s generative AI solutions run on Nvidia’s powerful graphics processors and can be deployed at twice the speed of competitors at half the cost.
Collaborations with Nvidia and Microsoft show that Oracle isn’t wedded to traditional, inflexible cloud solution strategies to grow its business. Its AI cloud offerings can be nimble and responsive for each company’s unique needs. This customer-centric approach is why the enterprise market has been clamoring for Oracle’s configuration solutions.
Oracle’s growth strategy is bearing fruit
For its third quarter, Oracle’s remaining performance obligations increased to $80 billion. It anticipates that 43% of this total — a staggering $34 billion — will be booked as revenues within the next 12 months. This contract backlog not only demonstrates there is huge, pent-up demand for the company’s services, but also that its AI cloud growth strategy is sustainable.
The company recently achieved another milestone. The February-ended quarter is the first time cloud revenue surpassed revenue from licensing and support services operations. This indicates that the company’s pivot from being a seller of legacy database systems to being a formidable AI cloud services provider is nearly complete.
Oracle does have a very high debt-to-equity ratio of 15.65, which is far above the software industry median of 0.21. But the company continues to generate abundant cash flow from operations — $18.2 billion over the past 12 months — which is enough for debt service requirements.
Investors should consider Oracle a long-term holding, as the current stock price doesn’t yet fully reflect its tremendous AI growth potential.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Kinsellagh has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.