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In a world increasingly dominated by artificial intelligence, Oracle (New York Stock Exchange: ORCL) has emerged as a strong player in the AI space. His dual approach of targeting industry-specific AI applications while also providing a platform for general-purpose AI has positioned him uniquely in the industry. market. This article explores Oracle’s competitive advantage in AI, with a focus on strategic partnerships, innovative platforms, and the value proposition offered by Oracle Cloud Infrastructure (OCI).
Assessing the Competitive Advantage of Oracle AI
Oracle’s position in the AI space is highly notable, cementing its position as a leading technology champion for industry-specific AI applications and as a platform provider for general-purpose AI. In our view, these two approaches — including targeted solutions for specific industries and a broader, more general purpose platform for AI — set Oracle apart and give it a unique competitive edge. I’m here.
in the meantime Latest OCI event, Oracle highlighted the capabilities of the OCI platform and highlighted its key strengths in the AI domain. AI/ML capabilities are accessible as APIs across the platform and are being integrated into Oracle Cloud-based products such as Fusion, NetSuite, and gradually Cerner. This integrated approach provides seamless AI solutions for Oracle customers and enhances the value proposition of cloud offerings.
Additionally, Oracle has extended the reach of AI into the areas of digital assistance, verbal/speech/visual processing, document comprehension, and anomaly identification. However, it is important to note that Oracle’s AI/ML models are designed to automate recursive tasks, not to perform creative or learning-based tasks. This difference distinguishes Oracle’s AI strategy from that of companies that employ large-scale language models (LLMs) like ChatGPT.
Oracle is already used by several AI technology customers as a platform to enable AI technology, including Character.AI, ADEPT, Twelve Labs, Mosaic, Falkonry, Vector Space Biosciences, SoundHound (SOUN), and CCC. These customers rely on his OCI infrastructure for AI model training and development, highlighting the platform’s versatility and robustness. As these customers roll out new features, it may attract more customers to her OCI. SoundHound, for example, recently announced that its SoundHound for Restaurants voice AI technology can be integrated with Oracle MICROS Simphony Point-of-Sale for Restaurants. This could help Oracle establish itself in the restaurant industry.
Oracle further strengthens its position as an AI powerhouse with a partnership with NVIDIA (NVDA) to build the first GTX cloud for training AI models. AI-focused computing capabilities cannot be taken lightly, as evidenced by the creation of an AI supercluster of 32,000 GPUs. Oracle’s network architecture was originally designed to support Oracle database clustering and has proven to be very effective in supporting the high-speed communication required for machine learning training and query execution on AI clusters. Proven.
Perhaps the most compelling argument for Oracle’s competitive advantage in the AI arena is its significant cost and speed advantage over its peers for AI-centric workloads. Given the compute-intensive nature of AI workloads, Oracle believes OCI’s speed and price advantages should provide significant competitive advantages. In our view, this could be an attractive value proposition, especially for small businesses and start-ups that are cost-conscious but need powerful AI tools.
For example, in contrast to other cloud providers, Oracle Cloud Infrastructure (OCI) offers a unique network architecture that hosts bare-metal NVIDIA A100 Tensor Core GPUs using RDMA over Converged Ethernet (RoCE) v2. This configuration enables high-bandwidth, low-latency connectivity across multiple nodes and multi-GPU instances. Why do NVIDIA GPUs show enhanced performance with OCI? The Ferrari clearly performs better on the racetrack than it does on country roads. In this analogy, OCI’s cluster network infrastructure and its off-box virtualization and other cloud innovations in his infrastructure can be likened to a racetrack. The simplicity, stability, and superior performance of this architecture reduce the cost per GPU hour, offering clear economic benefits to end users without sacrificing performance. This streamlined and efficient configuration is OCI’s equivalent of a smooth, high-speed racetrack, allowing Ferrari (his NVIDIA GPU here) to operate at peak performance.
Oracle is building a strong position in AI by leveraging its strengths as a platform provider and technology champion. The focus on industry-specific AI applications, strategic partnerships, and the cost and speed advantages offered by the OCI platform all point to a promising future for Oracle in the AI space.
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Oracle has established itself in AI, especially in infrastructure capabilities, but probably lags its main cloud competitors Microsoft (MSFT), Google (GOOG), and Amazon (AMZN). It is no exaggeration to say that From our extensive coverage and analysis of these companies, it is clear that their scale of investment, deep AI talent, depth of underlying models, and range of AI services exceed Oracle’s offerings.
For example, just last week we published an article highlighting the aggressive rollout of Amazon’s AI offerings and an impressive AI demo at Google I/O 2023. We wouldn’t expect such a pace of innovation from Oracle.
Given this situation, it’s hard to imagine the trajectory of Oracle’s rise as a frontrunner in AI services. However, it is important to note that Oracle can still build a profitable business model by skillfully positioning itself as a rapid adopter rather than an outright leader in the space. Investors in Oracle will have to watch closely to see if the company can catch up with the AI boom and profit from it.
Finance and Valuation
Note: All historical data in this section are from the company’s 10-K filings and all consensus figures are from FactSet.
An analysis of Oracle’s recent financial performance and market position shows that despite the challenges the company faces, it maintains strong growth prospects and offers promising investment opportunities. became clear.
ORCL’s third quarter earnings report for its third fiscal year showed revenue of $12.4 billion, up 17.9% year-over-year, demonstrating the company’s ability to generate healthy sales growth. We were encouraged by the fact that Oracle’s earnings growth was in line with consensus expectations, even though the company’s stock price fell -3.2% after the results. His CAGR for Oracle over the past three fiscal years has been 2.4%, indicating slow but steady growth. Looking ahead, sell-side consensus expects an even stronger revenue increase of 17.4% to reach $49.8 billion this year and another 7.1% to reach $53.4 billion next year.
However, it’s worth noting that Oracle’s first quarter EBIT margin narrowed to 41.8% from 45.8% in the same period last year. While the contraction suggests pressure on profitability, it’s worth noting that his EBIT margin for Oracle actually increased 2.2 percentage points over the last three fiscal years, from 44.0% to 46.2%. The market appears to be pricing in a temporary slump, with consensus forecasts for profit margins to widen to 43.2% next quarter from 41.9%.
We appreciate Oracle’s shareholder-friendly approach, as seen in its share buyback strategy. Over the past three years, Oracle has successfully reduced its common stock outstanding by 16.8%, more than offsetting shareholder dilution from stock-based compensation (SBC), which accounted for his 5.0% of sales. I was. This strategy contributed to his CAGR of 11.7% in his EPS over the last three fiscal years, outpacing revenue growth.
From a valuation standpoint, Oracle currently trades at a premium to the S&P 500 in terms of EV/sales, P/E and FCF multiples. However, it is traded at a bargain from an EV/EBIT perspective. We believe this premium is justified given the strong return on invested capital of 8.8% and the company’s strong growth prospects. Also, Oracle’s 1.1 PEG ratio is a 25.7% discount compared to his 1.5 PEG ratio in the S&P 500, suggesting the company’s growth is attractively priced.
Despite the recent stock price decline, we remain optimistic about Oracle’s growth prospects. The company’s steady earnings growth and expected recovery in EBIT margins, as well as its strategic share repurchase program, present an attractive investment proposition. The company’s strong return on invested capital and robust growth prospects suggest its current premium valuation is justified.
Conclusion
Despite fierce competition from big cloud players like Microsoft, Google and Amazon, Oracle has carved out its own niche in AI. The company’s ability to provide industry-specific AI applications and a versatile and robust OCI platform is a testament to its strategic approach to the AI market. While it may be difficult for Oracle to emerge as a frontrunner in AI services, its position as a rapid adopter and the significant cost and speed advantages it offers for AI-centric workloads make it an attractive proposition. It is
From a financial performance and valuation standpoint, Oracle boasts solid growth prospects and offers promising investment opportunities. Despite the recent share price decline, the company’s steady earnings growth, projected recovery in EBIT margins, and strategic share buyback program all point to an attractive investment story. This, combined with Oracle’s high return on invested capital, suggests its premium valuation is justified. As we move forward, investors should pay close attention to Oracle’s AI strategy and its ability to profit from the AI boom.
