Oracle(NYSE: ORCL) stock got off to a shaky start in 2025 and it's trading down about 9% so far as of this writing. The drop-off is due to multiple factors, ranging from overall negativity in tech stocks thanks to the tariff-induced trade war that has led investors to enter a risk-off mode to questions about the viability of the billions of dollars being poured into artificial intelligence (AI) infrastructure.
The database management and cloud solutions provider also saw a sharp dip in the stock price after it missed Wall Street's revenue and earnings expectations for the third quarter of fiscal 2025 (which ended on Feb. 28). Oracle's growth was anemic last quarter, and the company also missed Wall Street's revenue guidance for the current quarter by a whisker.
However, the company's forecast for the next couple of fiscal years was encouraging, and it won't be surprising to see Oracle sustaining elevated levels of growth beyond that. Let's look at the reasons why buying Oracle stock on the dip could lead to rich rewards for investors over the next three years.
Oracle's growth is set to pick up
Though there was nothing special about the 8% increase in Oracle's revenue last quarter along with the 4% jump in its earnings, the tech giant expects its growth rate to accelerate beginning in fiscal 2026. Management is quite confident the company can hit its fiscal 2026 revenue guidance of $66 billion, which would translate into a 15% jump from the ongoing fiscal year.
Meanwhile, it expects fiscal 2027 revenue growth to jump to an even better rate of 20%. If that's indeed the case, Oracle's revenue after a couple of fiscal years could get close to $80 billion. That would be higher than consensus estimates.
What's worth noting here is that Oracle's backlog is big enough to help it easily meet its growth expectations for the next couple of years. The total value of the company's unfulfilled contracts -- known as remaining performance obligations (RPO) -- stood at a staggering $130 billion at the end of the previous quarter. The metric shot up a remarkable 63% from the year-ago period in constant currency terms, thanks to the massive number of bookings that Oracle received last quarter.
A big reason behind the tremendous jump in Oracle's RPO is the huge demand for its cloud infrastructure, which is being used by customers for AI model training and inference. Oracle management remarked on the latest earnings conference call that it is unable to keep up with the demand for its cloud infrastructure services.
As a result, the company is busy ramping up its cloud capacity at an aggressive pace. This should allow it to fulfill more of its contracts, and attract more customers as well, since it will be able to serve them without much delay. So, the possibility of Oracle exceeding its own growth estimates in the coming years cannot be ruled out, as the cloud AI market is expected to clock annual growth of almost 31% through the end of the decade.
All this indicates why Oracle should be able to sustain solid levels of growth beyond the next couple of fiscal years.
The company's accelerating earnings growth could send it soaring over the next three years
We have seen that Oracle's earnings growth wasn't all that impressive last quarter. That can be attributed to the big jump in its capital expenditure (capex) this year. Oracle expects its capex to jump by a little more than 2x in fiscal 2025 from the preceding year to $16 billion. That's necessary, as the company needs to bump up its infrastructure substantially to fulfill the contracts that it has been signing.
The good part is that Oracle's earnings growth should pick up once it has built up enough capacity to satisfy its huge backlog and keep up with the rapidly growing demand for cloud AI infrastructure. Not surprisingly, analysts expect Oracle's earnings growth to accelerate over the next couple of fiscal years from fiscal 2025's projected levels of $6 per share.
Assuming the company manages to grow its bottom line by another 15% in fiscal 2028, its earnings could jump to $9.39 per share after three years. If Oracle trades at 29 times earnings at that time, in line with the Nasdaq-100 index's earnings multiple (using the index as a proxy for tech stocks), its stock price could hit $272. That would be a 75% jump from current levels.
What's worth noting here is that Oracle stock trades at just 21 times forward earnings right now, so investors can buy this AI stock at a very attractive valuation and enjoy the healthy gains that it is likely to deliver over the next three years.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.
