Could Oracle Become the Next Microsoft?

Microsoft‘s (MSFT -0.17%) stock surged nearly 1,000% over the past decade and turned it into the world’s most valuable company, with a market cap of $3.2 trillion. That massive growth spurt was driven by the expansion of its mobile, cloud, and AI ecosystems under Satya Nadella, who became the company’s CEO in 2014.

Microsoft is still one of the market’s top AI stocks, but investors are probably already looking for the next tech stock that could replicate those gains over the next decade. Could that company be Oracle (ORCL 0.27%), which is also gradually expanding its cloud and AI ecosystems but has a smaller market cap of $350 billion?

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The similarities and differences

Microsoft and Oracle operate different business models. Microsoft is a more diversified company and generates most of its revenue from its Windows operating system, Office productivity software, Azure cloud-based infrastructure platform, and other cloud-based services. It also sells ads in its Bing search engine, PC hardware through its Surface division, and video game products through its Xbox division.

Over the past decade, most of Microsoft’s growth stemmed from Azure and the conversion of its Office products and Dynamics customer relationship management (CRM) platform into cloud-based services. Its investments in OpenAI also allowed it to integrate the start-up’s generative AI tools into its own cloud-based ecosystem.

Oracle is one of the world’s top database software companies. It initially established an early mover’s advantage with its on-premise applications, but Amazon and Microsoft pulled ahead with their own cloud-based database services. To keep pace with that shift, Oracle transformed its on-premise applications to cloud-based services and inorganically expanded its ecosystem with more enterprise resource planning (ERP), CRM, and healthcare IT management services. It also launched its own cloud platform, Oracle Cloud Infrastructure (OCI).

Oracle now ranks third in the cloud-based database software market, behind Amazon and Microsoft, while OCI is still a tiny platform compared to Amazon Web Services (AWS), Microsoft Azure, and Alphabet‘s Google Cloud. It also ranks third in the CRM market behind Salesforce and Microsoft, and it remains a distant underdog in the fragmented ERP market. That’s probably why Oracle isn’t often mentioned in the same breath as Microsoft or Amazon.

Oracle is still expanding its cloud and AI businesses

Oracle generated 38% of its revenue from its total cloud services in its latest quarter. By comparison, Microsoft generated 54% of its revenue from its cloud services last quarter.

Oracle plans to keep expanding its cloud business to offset the slower growth of its on-premise, licensing, and support divisions. It expects the rising usage of its back office database and ERP applications, the growth of OCI, and a new AI infrastructure contract with Nvidia to drive that expansion and widen its moat.

In its latest earnings report, CEO Safra Catz said Oracle expected to “continue receiving large contracts reserving cloud infrastructure capacity because the demand for our Gen2 AI infrastructure substantially exceeds supply — despite the fact we are opening new and expanding existing cloud datacenters very, very rapidly.”

But could Oracle replicate Microsoft’s gains?

In other words, Oracle should benefit from the expansion of the AI market, which Grand View Research expects to grow at a compound annual growth rate (CAGR) of 37% from 2023 to 2030. But a lot of those gains will still be offset by its slower-growing legacy businesses.

From fiscal 2023 (which ended last May) to fiscal 2026, analysts expect Oracle’s revenue to increase at a CAGR of 8% as its EPS rises at a CAGR of 22%. A large portion of that earnings growth will likely be driven by big buybacks. It already bought back 38% of its shares over the past 10 years, and it should maintain that tradition for the foreseeable future.

Those growth rates are stable, but they probably won’t turn Oracle into the next Microsoft. From fiscal 2013 to fiscal 2023 (which ended last June), Microsoft grew its revenue at a CAGR of 11% as its EPS rose at a CAGR of 14%. From fiscal 2023 to fiscal 2026, analysts expect its revenue and EPS to increase at a CAGR of 15% and 17%, respectively, as it continues to expand its cloud and AI ecosystems.

Assuming Oracle matches analysts’ expectations for the next three years, continues to grow its EPS at a CAGR of 20% from fiscal 2026 to fiscal 2033, and trades at 20 times earnings, its stock could more than triple to $400 a share and lift its market cap to about $1.1 trillion. That would be an impressive 10-year gain, but it wouldn’t match Microsoft’s massive rally over the past decade. It would also still be a lot smaller than today’s Microsoft.

So instead of wondering if Oracle will shake off its reputation as a dusty old tech stock and become the next Microsoft, investors should focus on its core strengths: it’s successfully expanding its own cloud and AI businesses in the shadow of its larger competitors, it’s returning plenty of cash to its shareholders, and its stock is still reasonably valued.