Oracle Bull Says Software Giant Sharpening Its AI Edge

One Oracle Corp (NYSE: 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 (NASDAQ: MSFT) and noted that following a series of checks, Oracle appears to be benefiting.

The company has outsized allocations of Nvidia Corp (NASDAQ: 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.