Over the last six months, so much has been said about the potential impact of AI on our lives, for good and bad, that it is hard not to think of the subject as having been overhyped. But that is just what happens when something with the potential to revolutionize society and the economy meets a 24 hour news cycle. We all get bored to death, but that doesn’t lessen the potential of generative AI and its rapid adoption to have a massive impact in many areas. If you doubt that, ask the executives and shareholders of Oracle (ORCL).
Last night, they reported beats on both the top and bottom lines, raising revenue guidance as they did so and talking enthusiastically of the impact of AI on their business. The stock, having already popped around 10% in the two trading days prior to the release yesterday, is this morning indicating an opening around 5.5% above yesterday’s close. That is remarkable given that ORCL was, by comparison to some other tech companies, late to the party.
For many years, Oracle was the sleeping giant of tech, a name that it seemed everyone knew, but no one really wanted to buy. In the decade beginning at the start of 2010, the stock of tech companies like Google parent Alphabet (GOOG, GOOGL) and Amazon (AMZN) posted exponential gains as they took advantage of the increasing role of computing in our daily lives and in the way corporations of all stripes and sizes did business. Oracle, however, did okay but seemed to get left behind, with the stock roughly doubling in the decade starting in 2010 while GOOG posted gains of over 500% and AMZN went from a split-adjusted level of around $5 to around $90. As “cloud computing” became a thing, Oracle lost out to more aggressive adopters and sellers of the idea of massive server farms to meet the exponentially increasing need of businesses for computing power.
It looked for a while as if they were going to make the same mistake again when it comes to AI, having only recently got into the game and started to target that market. Now, though, there is so much demand that even the laggards like Oracle are reaping rewards. Yes, they have transformed themselves to some degree in terms of becoming leaner and more focused, but entering a rapidly growing market in a serious way once others have a solid first mover advantage usually results in disappointment. However, in this case the market has grown so far and so fast that there is still plenty of profit to go around, and that may even give a late entrant a bit of an advantage. They are able to come in when early mistakes have already been made and the needs of potential customers are a little clearer, giving them the kind of edge that Apple (AAPL) has created for itself by pursuing similar tactics for many years.
So, is ORCL a good bet for future gains as AI continues to grow?
It could well be. They now have a proprietary AI product that they are using internally and intending to offer customers, but their real strength comes from being a supplier of equipment that is needed if corporations are to take advantage of the boom. Oracle’s hardware and software solutions for businesses can benefit whichever AI product, if any, emerges as dominant over the next few years. There is, however, a risk inherent in that that makes me prefer something like Amazon or Alphabet as long-term investments.
The hype around AI has inevitably created a backlash, with dystopian visions of a future where the machines make their own decisions and take over becoming commonplace. That will probably turn out to be sensationalized science fiction, but it does create a situation where politicians will feel the need to get involved and at the very least attempt to slow the pace of adoption of the new technology. The idea of a machine-led world is scary, and politicians are never averse to pandering to our fears, so regulation of some kind that slows progress will come.
When it does, companies like Amazon and Alphabet for whom the AI boom is an add-on to existing businesses will fare better than Oracle, for whom it is rapidly becoming the main driver of success. That, however, is not in the immediate future, and for now, ORCL can continue to post gains. If you choose to join in or are already invested, know that taking a profit on a stock like ORCL before too long will probably prove to be a smart thing to do.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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