Oracle Bull Says Software Giant Sharpening Its AI Edge

One Oracle Corp ORCL analyst is turning positive as he sees the software company sharpening its edge in cloud on the back of GPU supply constraints.

What Happened: UBS analyst Karl Keirstead upgraded Oracle from a Neutral rating to a Buy rating and raised the price target from $120 to $140, citing upside potential in Oracle cloud infrastructure.

"We are increasingly confident that Oracle has carved out an under-appreciated edge in terms of its GPU capacity as well as its OCI architecture, enough to attract new customers and drive OCI usage," the UBS analyst said in a new note to clients.

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Keirstead highlighted GPU supply constraints for several big cloud infrastructure providers like Microsoft Corp MSFT and noted that following a series of checks, Oracle appears to be benefiting.

The company has outsized allocations of Nvidia Corp NVDA GPUs relative to its size, and the GPU shortage could last for six to 12 months, the analyst noted.

"And we haven’t even seen the $2b in AI start-up commitments convert to OCI usage," Keirstead said.

The UBS analyst believes Oracle has a "speed-to-deployment edge" over some of the bigger players in the space. Oracle's SaaS business could also prove to be a quiet AI beneficiary, he added.

With Oracle shares up more than 40% since the start of the year, the stock is already getting a boost from its AI ties, but the analyst believes there's more to come.

He emphasized that AI start-ups may just be one quarter into ramping OCI use. Other catalysts include the company's upcoming CloudWorld event and Investor day, as well as potential analyst upgrades. Only about 40% of sell-side analysts have a Buy on Nvidia, he said.

On a free-cash-flow valuation basis, Oracle doesn't look particularly attractive, but earnings tell a different story. At just 20 times earnings, Oracle is trading at a discount to large-cap tech peers and could be better positioned given the GPU shortage ahead.

The UBS analyst said shares could trade as high as $186 if the upside case plays out or as low as $89 in a more bearish scenario, but Keirstead has his sights set on $140, which offers more than 15% upside from current levels.

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ORCL Price Action: Oracle shares were up 2.94% at $120.25, at the time of writing, according to Benzinga Pro.

Photo: Open Grid Scheduler from Flickr.