Motley Fool Hidden Gems Investing - Oracle and the AI Boom

Starting point is 00:00:00 You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. it's the cloud behind the cloud kind of you're listening to motley fool money i'm ricky mulvey joined today by tim byers tim we were talking earlier and i have to say

Starting point is 00:00:55 you sound a lot less caffeinated when i'm talking to you on zoom versus when i'm listening to you at 1.5 speed on motley fool live but i appreciate you being here thanks thanks for being here thanks ricky good to be here i still have caffeine i'm ready to go okay let's go that's let's go let's start with oracle because the software giant reported earlier this week investors liked liked the results uh stocks up about 13 on it that's pretty good for a uh something like a 300 billion company. I'm going to give some of the highlights and then see what stood out to you. So there seems to be a lot of new business coming Oracle's way with the remaining performance obligation, which is how much money is left in those contracts up 44% to almost a hundred billion.

Starting point is 00:01:40 They got 30 new AI contracts for over 12 billion signed just this quarter. We also have Larry Ellison touting deals with Nvidia, Microsoft, Google, XAI, who are all using Oracle cloud services and data centers. Anything from this quarter from Oracle really stand out to you? Well, I mean, it's a good quarter overall. Let's give credit where credit is due here. The cloud services and license business was up 12% on a pure basis, 11% in terms of constant currency, overall revenue up 6%. This is a big company, so 6% for a big company that generates essentially $53 billion in a given year. 6% is quite a lot. But it is notable that Oracle really depends on that cloud business, that AI business doing what it's doing presently. And there is

Starting point is 00:02:37 something great about the way that Oracle has structured this. The idea here, Ricky, you said the cloud behind the cloud, kind of. And I think that's a fairly good description here. Because what's happening is that Oracle is selling some hardware, and it sells its cloud services, it interconnects them into the other clouds. When you are, say, working inside of, for example, Microsoft Azure, you may be touching some Oracle equipment, you might be touching some Oracle services, you might be touching the Oracle databases, because there is Oracle stuff. It's, I mean, not to get too, I'm not trying to make anybody hungry here, Ricky, but if you could think of it as the Oreo cookie, you know, Microsoft has got, you know, they've got the chocolate

Starting point is 00:03:33 wafers, and then you've got some stuffing inside that is made of some mystery stuff. And inside the mystery stuff is some oracle stuff how's that uh i'm still a little lost on the oreos to cloud data services provider but one way one way i've heard this explained and it makes sense is oracle has something called remote direct memory access and and what this allows computers to do is essentially get the data from one computer of another without essentially involving the operating systems of either so if you're using a huge data database that you need for a like an ai system it would make a lot of sense to use a to use an oracle cloud solution yeah and but all of that is dependent of course on it being set up inside the environment such that you could access it

Starting point is 00:04:25 through you know that remote that remote data scheme now to be fair i'm not entirely familiar with exactly how Oracle sets this up. What I do know is that by virtue of these interconnect agreements and by virtue of essentially Microsoft, Google, and others reselling Oracle by virtue of putting Oracle inside their environment, that's a great position for Oracle to be in because it means that as these clouds expand capacity for doing things like serving AI workloads, That's just more good business for Oracle. It's another great channel for them. They do have something to crow about here. It's different than them just selling their cloud independently and trying to compete with the others. It's a bit of judo. Frankly,

Starting point is 00:05:18 it's a bit of smart judo. I give them credit for that. At the same time, this is a company that's not growing very quickly, but is issuing a whole boatload of equity. I mean, they are issuing equity, Ricky, as if they are a growth company, and they are verifiably not. And I find that fascinating that nobody talks about that. Just for the listener to be aware, this is a take that Tim has been itching to give, which is the stock-based compensation coming out of Oracle. So, Oracle spent about $4 billion on stock-based comp for the year. The company made $53 billion in revenue and a little under $19 billion in cash from operations. So, we'll focus on that. $4 billion in stock-based comp and about $19 billion in cash from operations.

Starting point is 00:06:11 Let's set up the landscape first. How does this stack up to the competitors? And why is this drawing your attention now, Tim? Well, it's very similar to Salesforce. And I suppose I shouldn't really be bothered by that, Ricky. But I think it's interesting that the way that Oracle issues equity and at the rate that they issue it is like a growth company, is a little bit like Salesforce, except that it's going higher. They're issuing more of it. And Salesforce is issuing less. Now, on the basis of a ratio, so let's say as a percentage of revenue, like 7.5%. 7.5% of Oracle's revenue issued as equity, stock-based compensation. Salesforce, it's about 8%. So Salesforce is

Starting point is 00:07:00 still higher. But I think we tend to think of Oracle as a mature, established, settled company that's in the Microsoft realm. Not by virtue of its stock-based compensation, it isn't. It's still issuing a huge amount of equity. What that tells me, Ricky, is that the cost of Oracle, the cost to essentially grow its opportunity is really high. They have to pay some serious premiums to people in order to get them in the door and do the work that creates this position. To be fair, it's a fairly enviable position, but I just find it startling that the costs are that high. One of the things that makes them different is they have about $7 billion in just really hardcore capital expenditures. They are building equipment. They are building data centers.

Starting point is 00:08:03 They're investing in a lot of hard goods, and that makes them different from a company like Salesforce. But it's a company that's far older than a peer like Salesforce, because they're born in the 1970s. I would put it this way, it's like the older gentleman having a midlife crisis and is spending like that midlife crisis is in full swing. And that is fascinating to me because we're not behaving like Oracle is that company, but they kind of are, Ricky, they are. If you look at the stock chart for Oracle

Starting point is 00:08:45 and the chart for stock-based compensation, they seem to be moving in tandem, which is almost on a logarithmic curve up and to the right. As long as the performances are matching each other, doesn't that make it more forgivable?

Motley Fool Hidden Gems Investing - Oracle and the AI Boom

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