Freedom: contract with Japan will strengthen Oracle’s position in the cloud technology market

Oracle (ORCL) shares rose 1.4% in premarket trading on Monday, July 13, after reports that the company is being considered among the leading contenders to supply cloud infrastructure for Japan’s government agencies. The company is one of the world’s largest developers of enterprise software and providers of cloud services. According to media reports, Oracle is ahead in talks with its biggest competitors—Amazon Web Services, Microsoft, and Google.

What to know about Oracle

Oracle offers database management solutions, business applications, cloud infrastructure, and tools for working with artificial intelligence.

One of Oracle’s key growth drivers in recent years has been the development of its cloud segment, Oracle Cloud Infrastructure (OCI)—the company’s platform for data storage, renting computing power, and running applications in the cloud. This is the business that competes with Amazon Web Services (AWS), Microsoft Azure, and Google Cloud for corporate and government clients.

Why the market reacted positively to the contract with the Japanese government

The agreement could become one of Oracle’s largest government projects in recent years. The company would receive not only multibillion-dollar revenue over several years, but also an opportunity to significantly strengthen its position in the global cloud technology market.

Freedom analyst Vladimir Chernov notes that it is especially important for investors that Oracle Cloud Infrastructure is being viewed by government customers as a full-fledged alternative to AWS, Microsoft Azure, and Google Cloud solutions. 

What risks remain

Despite the market’s positive reaction, a final decision by the Japanese authorities has not yet been made. There is a possibility that the contract will be split among several cloud service providers, which would reduce the potential financial impact for Oracle.

In addition, the company will need to continue competing with the market’s largest players—AWS, Microsoft Azure, and Google Cloud—which retain a significantly larger share of the global cloud infrastructure market.

What supports Oracle

Freedom previously noted that Oracle’s fourth-quarter results exceeded market expectations thanks to rapid growth in its cloud business. The company’s total quarterly revenue increased 21% year over year to $19.2 bn. At the same time, Oracle Cloud Infrastructure (OCI)—the cloud infrastructure segment that directly competes with AWS, Microsoft Azure, and Google Cloud—posted 93% growth to $5.8 bn due to strong demand for AI and data-center capacity.

An additional driver for Oracle will be PIMCO’s participation in financing the construction of the company’s largest data center in Michigan. PIMCO is an investment company managing more than $2 tn in assets. It was considering providing about $14 bn in debt financing for the Oracle project, and the total investment in the campus was estimated at roughly $16 bn.

The data center is being built to expand Oracle’s cloud infrastructure and support OpenAI projects in the field of artificial intelligence.

Oracle also announced a switch to Bloom Energy fuel cells for a new data center in New Mexico, which should reduce reliance on traditional energy sources. At the same time, Oracle continues to optimize its cost structure and has launched a workforce reduction program affecting several thousand employees.

This is not an individual investment recommendation.