oracle (ORCL 2.90%) was founded in 1977 and has been involved in almost every technological revolution since then. The company first rose to prominence with its database management software, but then it helped its business customers prepare for the dawn of the Internet, cloud computing, and now artificial intelligence (AI).

Oracle operates some of the best data center infrastructure in the industry for developing AI, and demand significantly exceeds supply. The company will report its financial results for the first quarter of fiscal 2025 (ended November 30) in early December, and there’s one number every investor should keep an eye on.

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A leading provider of AI data center infrastructure

To make AI chatbots and software applications “smarter,” they need to run on larger Large Language Models (LLMs). Industry-leading LLMs – like those developed by OpenAI and Anthropic – now have trillions of parameters, making them well-versed in a wide range of topics. Training these LLMs requires a lot of computing power, as does making them available to customers, which is called the AI ​​inference phase.

Both training and inference take place in data centers equipped with graphics processing units (GPUs) from vendors such as: B. are filled Nvidia. Tech giants like Oracle build, manage and rent this infrastructure to developers for a fee, usually charged per minute. Therefore, these developers will flock to data center providers with the fastest data centers as this typically means lower costs.

Oracle Cloud Infrastructure (OCI) superclusters allow developers to scale up to 65,536 Nvidia GPUs (and soon more than 131,000 of the latest Blackwell GPUs), which is more than any other data center provider. Additionally, the company’s RDMA (Random Direct Memory Access) network technology transfers data from one point to another much faster than traditional Ethernet networks, contributing to lower costs.

Automation is another key factor. Regardless of size, every Oracle data center is identical in terms of functionality. This means the company can operate them all through software without the need for human staff. This of course keeps costs down, but also enables Oracle to set up and commission new data centers extremely quickly.

Oracle is widely considered one of the most cost-effective data center operators in the industry, attracting top AI startups like OpenAI, Cohere and Elon Musk’s xAI. In fact, the company can’t keep up with demand – as of the first quarter of fiscal 2025, it had 162 data centers either operating or under construction, but it plans to have between 1,000 and 2,000 at some point.

The key number every investor should keep an eye on

The revenue that Oracle generates from leasing its data centers is reported in the OCI segment. That part of its business generated record revenue of $2.2 billion in the first quarter of fiscal 2025, up 45% from the same period last year.

This growth rate has accelerated from the previous quarter, and the company has often said that OCI revenue could grow at least 50% on a consistent basis.

As I mentioned earlier, Oracle can’t keep up with demand for its data centers. They’re building new ones as fast as they can, but lack of supply is the main reason why OCI sales haven’t increased by 50% or more in recent quarters.

This is reflected in the company’s remaining performance obligations (RPOs), which are something like a backlog. RPOs reached a record $99 billion in the first quarter, a whopping 53% increase over the same period last year. Oracle said it signed 42 new contracts for GPU computing capacity worth $3 billion in the first quarter alone.

OCI revenue (and its growth rate) is the key number investors should keep an eye on when Oracle reports its latest results this month.

Oracle has a bright future in AI, but its shares aren’t cheap

Oracle shares are up 72% so far in 2024 and are trading near a record high. Based on trailing 12-month earnings per share of $3.88 and the share price of $181.41 as of this writing, the company trades at a price-to-earnings (P/E) ratio of approximately 47.

That’s a 48% premium over that Nasdaq-100 Index trading at a P/E ratio of around 32, meaning Oracle stock is quite expensive compared to its big tech rivals.

Therefore, investors with a time horizon of one year or less should probably avoid buying this stock. However, for investors willing to hold the stock for the next five years or longer, the picture is slightly different.

The automated nature of Oracle’s data centers should increase the company’s gross margin at scale. So, as mentioned, if the company expands its data center space by 10x, its profit growth could accelerate in the next few years.

That alone could lead to excellent long-term returns for investors, even if they pay a premium for the stock today. However, this scenario depends on continued strength in the OCI segment. Therefore, it is important to monitor Oracle’s results not just in December, but in each coming quarter.