Oracle: A Future Member of the $1 Trillion Club

The U.S. economy has a strong history of producing some of the world's most valuable companies. For instance, United States Steel became the first company to reach a valuation of $1 billion back in 1901. Later, General Motors became the first-ever company to hit $10 billion in 1955, riding the wave of the automotive boom. Further milestones were set by General Electric, which became the first company to exceed $100 billion in 1995, and Apple, which crossed the $1 trillion mark in 2018, largely due to the popularity of its iPhone.

Currently, Apple holds the title as the world's largest company, valued at $3.7 trillion. Since 2018, six other American tech giants have also joined the exclusive trillion-dollar club, including Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, Tesla, and Broadcom.

Now, there is potential for another company to join this elite group within the next four years. That company is Oracle (ORCL), which is seeing a significant increase in demand for its data center services, especially from leading artificial intelligence (AI) developers. Management predicts that this part of their business could expand by more than tenfold.

High Demand for Oracle's Data Centers

Nvidia's CEO Jensen Huang has forecasted that data center operators, including Oracle, Microsoft, and Amazon, will collectively spend around $1 trillion over the next four years to upgrade their infrastructures to support the rising needs of AI developers. This upgrades include outfitting data centers with thousands of specialized chips known as graphics processing units (GPUs), which are essential for processing large datasets needed for AI workloads.

Oracle's Cloud Infrastructure (OCI) is designed to accommodate an impressive number of Nvidia's H200 GPUs, up to 65,000, more than any competitor. This vast capacity allows developers to create and deploy larger AI models, resulting in more sophisticated software.

Moreover, OCI's advanced technology enables data to move faster than traditional Ethernet networks. Since many developers rent computing power by the minute, this speed translates into significant cost efficiency. Recently, Oracle reported a staggering 336% increase in GPU usage in their second quarter of fiscal year 2025 compared to the same period last year, indicating a surging demand for its services. Their infrastructure is already attracting AI startups like Cohere, OpenAI, and xAI.

Currently, Oracle operates 98 data center regions, with ambitious plans to expand to between 1,000 and 2,000 regions in the future. This growth strategy includes new clusters that will feature over 131,000 of Nvidia's latest Blackwell GPUs, enabling the most cutting-edge AI applications and expected to drive even greater demand.

Rapid Growth of OCI

In its second fiscal quarter, Oracle reported total revenues of $14.1 billion, but the OCI segment accounted for only $2.4 billion of that total. Although still a smaller contributor compared to Oracle's software-as-a-service (SaaS) business, which generated $3.5 billion, OCI is proving to be the fastest-growing segment. While SaaS revenue experienced a 10% year-over-year increase, OCI revenue surged by 52%. This marked the fastest growth in a year and indicated a second consecutive quarter of consistent acceleration.

OCI's revenues could have been even higher if Oracle had sufficient data center capacity to meet existing demand. This unmet demand is reflected in the company's remaining performance obligations (RPOs), which skyrocketed by 50% to $97 billion in the second quarter. RPOs are future revenues based on agreements to deliver services, implying a potential surge in OCI revenues once Oracle increases its data center operations.

Additionally, Oracle's CEO, Safra Catz, expects RPOs to continue rising significantly due to the considerable volume of new deals, including a noteworthy agreement with Meta Platforms. This deal allows Meta, the creator of widely-used open-source large language models known as Llama, to leverage Oracle's infrastructure for some of its training workloads.

Pathway to the $1 Trillion Club

Currently, Oracle's stock is trading at a price-to-earnings (P/E) ratio of 40.5, which is slightly higher than the averages for Microsoft, Amazon, and Alphabet, which are around 36.7. However, when considering Oracle's potential earnings, the stock appears even more appealing. Wall Street forecasts that the company's earnings per share (EPS) will increase by 14.4%, reaching $7.05 during its fiscal year 2026 (commencing in June). This forecast implies a forward P/E ratio of just 23.5.

The math suggests that Oracle's stock needs to rise by 72.3% over the next 18 months just to maintain its current P/E ratio of 40.5, which would mark the company’s valuation at nearly $800 billion. If EPS grows again by 14.4% in fiscal years 2027 and 2028 while keeping the same P/E ratio, Oracle would officially enter the $1 trillion club.

Even if the P/E ratio stabilizes at 36.7, the company's valuation would still approach $950 billion. Given Oracle's earnings growth of 22% in the first half of fiscal year 2025, it is plausible to expect this growth rate to persist or even accelerate, suggesting that Wall Street's projections may be overly conservative. With plans to expand its data center footprint significantly and the profitability of its fully automated infrastructure improving as more data centers become operational, Oracle's potential looks promising.

During the latest quarterly calls to investors, Catz highlighted that the gross profit margin from the infrastructure segment is growing as more data centers come online. If Oracle achieves an annual growth rate of 22% instead of 14% leading into fiscal year 2028, it would almost certainly secure its spot in the $1 trillion club, even if its P/E ratio adjusts to around 34.

Oracle, AI, Market, Growth, Investors