(Bloomberg) -- Oracle Corp. is on track for its best year in over two decades because its once-struggling cloud business is being taken seriously by customers and investors.
The software giant has long tried to find its place in the lucrative business of renting out computing power and storage over the cloud, which is dominated by much-larger rivals led by Amazon.com Inc.’s Web Services and Microsoft Corp.
Technically demanding workloads for training artificial intelligence models and marquee customers like Uber Technologies Inc. and ByteDance Ltd.’s TikTok have fueled a rapid expansion of Oracle’s cloud infrastructure business over the past year. Wall Street analysts project that the unit will generate more than $10 billion in annual sales in the fiscal year ending in May 2025.
Oracle, which reports fiscal second-quarter earnings Monday, has seen that enthusiasm drive its shares up 82% in 2024, which if it continued would be the stock’s largest annual rally since 1999.
Founded in 1977, Oracle’s namesake database became dominant in the corporate world, bringing high margins and growth. But the 2010s were kind of a lost decade. Its stock underperformed industry benchmarks and trailed far behind software peers like Salesforce Inc. and Adobe Inc., which focused on offering applications via the cloud rather than installing it on customer devices.
Oracle first launched a cloud infrastructure service in 2016, but it struggled to gain traction. Thomas Kurian, who led the initiative, left the company in 2018 over a strategy disagreement with Chairman Larry Ellison and joined Alphabet Inc.’s Google to run its cloud unit.
It wasn’t until 2022 that customers and investors started taking Oracle’s cloud seriously, said John DiFucci, an analyst at Guggenheim Securities. He said he now hears about the cost and performance benefits of Oracle’s service compared with other vendors.
“Oracle may not be known as the early leader in the cloud, but its persistent development efforts, large footprint within IT and sizable wallet share give it a unique position of account leverage,” wrote Derrick Wood, an analyst at TD Cowen, in his summary of the company.
The total infrastructure market increased 23% to $84 billion in the third quarter, the fourth consecutive period of year-over-year growth, “with generative AI being a major factor,” John Dinsdale, chief analyst at Synergy Research Group, said in a statement. While Synergy pegs Oracle for just a single-digit share of that spending, the market is expected to continue to expand with greater demand for AI services, he said.
Ellison, 80, has steered Oracle for more than 40 years. He stepped back from the chief executive officer role about a decade ago and today is chief technology officer as well as board chairman. Ellison’s wealth has jumped along with Oracle’s stock value, and he is now the world’s fourth-richest person, according to the Bloomberg Billionaires Index.
Broadly, software firms have seen slowing revenue growth in recent quarters due to tighter corporate budgets and a changes in spending habits to prioritize AI. By contrast, Oracle is one of the few large software companies to increase its pace of revenue growth over recent quarters, largely due to the cloud infrastructure business.
A large part of the increase is due to a nearly insatiable demand for computing power to handle AI workloads. At least for the near term, Oracle should continue winning an “outsized share” from startups like Cohere Inc. and Elon Musk’s xAI, wrote Rishi Jaluria, an analyst at RBC Capital Markets.
