The artificial intelligence (AI) hype is real, and it’s going to have a lasting impact on the entire technology sector.
Executives at Nvidia (NVDA) on Tuesday reported strong first-quarter financial results as data center customers clamored to buy its high-end AI chips. Shares jumped 27% this morning, and haven’t looked back.
Nvidia’s brilliant early bet on AI a decade ago has made it the leader in this extremely important new niche, but there are several other ways to play this game. For one, investors should buy Oracle
ORCL
At this stage investors understand most of the Nvidia AI story. The Santa Clara, California-based company builds the world’s most advanced AI chips. More importantly, the company governs CUDA, a platform used by academics and software developers alike to build complex AI models. The last bit is often overlooked.
The power of Nvidia’s hold on state of the art AI development is CUDA. The brightest minds in AI are developing on the CUDA. That platform depends on Nvidia smart silicon.
The Nvidia second-quarter guidance reflects this reality.
Executives said in a statement Wednesday that sales for the upcoming quarter are expected to reach about $11 billion. This astonishing number, beyond its massive scale, is 50% higher than expectations. The guidance is an outright blowout, higher than even the most bullish Wall Street outlook.
The key is data center customers can’t get enough of the Nvidia H100, a high end AI chip. Better still, there is no current competitor due to CUDA. There is an AI gold rush and Nvidia is selling the only pickaxes and shovels in town. The company has a virtual monopoly.
This is great for Nvidia and it’s being reflected in the aggressive bump in shares after the close on Wednesday. The stock traded at $394, its highest level ever and a 164% jump from January 1 this year.
The Oracle investment thesis is about its hold-over customers, the emergence of AI, and its new relationship with Nvidia.
Oracle is best known for its large legacy database business. This software is foundational to information technology at the bulk of the world’s largest enterprises, from Fortune 500 companies to governments and private foundations.
A large ecosystem of enterprise and third-party software development has evolved during the past five decades. The Oracle Cloud Infrastructure allows these developers to build powerful software as a service applications that run on the Oracle Cloud, customer hybrid clouds, or on-premise IT environments.
This ecosystem is the glue that binds legacy customers to Oracle.
Oracle executives in March announced a masterstroke. The Austin, Texas-based company partnered with Nvidia on next generation AI clouds. In addition to bringing state of the art Nvidia silicon to OCI, the deal will allow Oracle to resell Nvidia-backed services, including high performance storage to enterprises for their on-premises needs.
Keep in mind that Oracle has a sizable enterprise stranglehold and an aggressive sales force. The company should be able to leverage these relationships into significant new AI sales.
At a share price of $98.32 Oracle trades at 17.6x forward earnings. The price to sales ratio is 5.5x, well within the historical range. The stock is up 20.2% in 2023.
Based on a new AI sales cycle, shares could trade to $122.50 during the next six months, a gain of 24% from current levels.
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