We're starting a position in a venerable business software giant that's upped its cloud game

Published Tue, Aug 15 202310:10 AM EDT

We're initiating a position in Oracle (ORCL), buying 250 shares at roughly $115 each. Following Tuesday's trade, Jim Cramer's Charitable Trust will own 250 shares of ORCL, representing a weighting of approximately 1%. Wall Street was lower Tuesday as ongoing economic uncertainty in China and more signs of a resilient American consumer — which may cause the Fed to keep interest rates at a higher rate for longer — are putting pressure on U.S. stocks. Following a strong July for the markets, August has been less kind. The S & P 500 and Nasdaq dropped 2.16% and 3.89%, respectively, before Tuesday's declines. Finally, we are starting to see some of the weakness that we have patiently been waiting for with our healthy cash position north of 10%. Although stocks may continue to trend lower from their higher levels, we are more likely at this point to get a great buying opportunity in the near future than a selling opportunity now, as Jim explained in his Sunday column . With plenty of cash on hand, we have been scanning the market looking for new opportunities to gradually put some money to work in high-quality companies with secular tailwinds that are profitable and trade at reasonable valuations. This criteria brings us to Oracle . The first and most important thing to understand about Oracle is that the company has quietly become one of the top players in cloud infrastructure, joining the likes of Amazon Web Services (AWS), Google Cloud and Microsoft's Azure. For a long time, as those three companies moved first and established large initial market shares in the cloud, Oracle looked like it was being left behind. The thought was that Oracle had such a strong, entrenched business in on-premises software that it didn't want to shake things up and embrace the cloud computing revolution. Really, though, Oracle was just biding its time, fully formulating its cloud strategy — and for the past few years, it's been executing that strategy, to great success. Early in the cloud computing era, Oracle had some competitive cloud application businesses in Fusion and Net Suite. But the turning point was when Oracle launched its second-generation cloud infrastructure offering, called Oracle Cloud Infrastructure Generation 2, or OCI Gen 2, in the summer of 2020. The company's first-generation infrastructure product was, frankly, not very competitive versus the likes of Amazon's AWS, Alphabet's Google Cloud and Azure. But OCI Gen 2 is. The company says it's faster, cheaper and more secure than the competition. The pitch Oracle can now make is that the company can serve all of a customer's needs, with competitive offerings in both cloud applications and cloud infrastructure. With its longstanding dominance in on-premises infrastructure, it can also accommodate those who want more flexible models, like hybrid cloud offerings. While all the cloud infrastructure plays have been putting up big numbers for years, what the market is trying to figure out now is which one is the best for running generative AI workloads. This is the next big opportunity that's only just getting started. According to Oracle Chairman and CTO Larry Ellison, the Gen2 Cloud is the number one option for generative AI workloads because it has the "highest performance, lowest cost GPU cluster technology in the world." Even Nvidia (NVDA) is developing AI on the Gen2 Cloud, and it has partnered with Oracle to build the world's largest high-performance computer and AI computer with 16,000 graphics processing units (GPUs). Talk about a strong endorsement. But before all the talk about generative AI, Oracle put up some huge Cloud numbers in its fiscal 2023. In the first quarter of fiscal 2023 (the three months ended August 2022), Oracle's Total Cloud revenue grew 45% year-over-year, comprised of 43% growth for its Cloud Applications business and 52% growth for its Cloud Infrastructure business. In the second quarter of fiscal 2023 (the three months ended November 2022), Total Cloud revenue grew 43%, with 40% growth for Cloud Applications and 53% growth for Cloud Infrastructure. In the third quarter of fiscal 2023 (the three months ended February 2023), Total Cloud revenue accelerated back to 45%, with 42% growth for Cloud Applications and 55% growth for Cloud Infrastructure. But, in the most recent quarter (fiscal 2023 fourth quarter; the three months ended May 2023), announced June 12, is where the market really saw how Oracle's broader cloud strategy and AI leadership click. Total Cloud revenue growth surged to 54% again, with 45% growth for Cloud Applications and 76% growth for Cloud Infrastructure. Management also gave a strong forecast for its fiscal first quarter 2024 due to the "unprecedented demand for our cloud services and especially our AI services." The company expects cloud revenue, excluding contribution for its Cerner acquisition, will continue growing at least at a similar rate to what it experienced in fiscal 2023. And, as its high-growth cloud revenues become a larger portion of the total business, Oracle should see an acceleration in total revenue growth in fiscal 2024. ORCL YTD mountain Oracle YTD performance Overall, the company is facing a huge multiyear opportunity. At its most recent investor day last October, Oracle estimated its total addressable enterprise market to be $750 billion, comprised of the $265 billion addressable market for applications and $480 billion addressable market for infrastructure. For fiscal year 2026, Oracle is targeting $65 billion total organic revenue with 45% operating margins and annual earnings per share growth of more than 10%. One of the great parts of the Oracle story is that investors are paying for this growth at a very reasonable price. While boasting an excellent embedded growth narrative with its cloud applications and infrastructure, we're still talking about a very mature, nearly five-decade-old, company that's very profitable and throws off a ton of cash. Even after ORCL shares have basically doubled over the past three years, they still trade at just 20.5 times the $5.59 that Oracle is expected to have in EPS for fiscal 2024 (the 12-month period ending May 2024.) Those earnings are expected to grow about 13% to $6.31 for fiscal 2025 (the 12-month period ending May 2024.) Compare that to shares of Microsoft — probably the best comp for Oracle — which at $322 trade at 29.2 times the $11.02 per share that that company is expected to earn in its fiscal 2024 (the 12-period ended June 2024). Those earnings are expected to grow about 15% to $12.72 for fiscal 2025 (the 12-month period ending June 2025.). Oracle also uses its tremendous cash flow to pay a modest dividend — its quarterly dividend was increased by 25% earlier this year, from 32 cents per share to 40 cents, which works out to an annual dividend yield of about 1.2%. This may not look attractive relative to the federal funds rate of 5.25% to 5.50, but it's more than you'll get from Microsoft at 0.85% or Apple (AAPL) at 0.55%. Alphabet, Amazon and Meta Platforms (META) don't even pay a dividend. You won't find us knocking Microsoft because we think the world of the company and it has been a core stock for years in the Charitable Trust, the portfolio we use for the Club. Both Microsoft and Oracle can and should be owned here. But in a direct comparison between buying Oracle and Microsoft right now: Oracle gives you get nearly the same amount of earnings growth over the next two years at about two-thirds of the multiple and a slightly higher annual dividend yield. Those who have caught on to Oracle's increasingly competitive offerings in the cloud and its AI momentum have now caught a huge gain, but that doesn't mean the run is over from here. With the stock down about 10% from its peak in mid-June, we think the recent pullback is an attractive one to buy into. In starting a position in Oracle on Tuesday, we're putting a price target of $130 per share on the stock, which is a few dollars higher than the June high, and a 1 rating as our buy indicates. (Jim Cramer's Charitable Trust is long ORCL, MSFT, AMZN, GOOGL, APPLE, NVDA, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Canada goose walks on a path outside of Oracle headquarters on June 13, 2022 in Redwood Shores, California.

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