AI Cloud Leaders Oracle Google Show Investment Promise

The AI Gold Rush Fueling Cloud Growth

Artificial intelligence (AI) is unlocking profitable avenues for both businesses and investors. A key area where AI is set to drive long-term productivity is cloud computing. The cloud market, valued at $348 billion by Synergy Research, demonstrated robust growth of 23% year over year in the first quarter.

Leading cloud stocks are attractive long-term investments due to their significant investments in data centers. These facilities are crucial for storing data that companies leverage with AI to gain insights, foster innovation, and develop new products. This article highlights two cloud stocks with reasonable valuations that appear ready for a significant upward trend.

Oracle Riding the AI Wave with Accelerated Cloud Growth

Oracle (referenced as ORCL on NYSE) stock has tripled over the last three years, but it still offers upside. This leading cloud infrastructure provider just closed the books on fiscal 2025, where it posted better-than-expected revenue. The stock popped following the report and is closing in on a new all-time high.

While often overshadowed by hyperscale giants like Amazon Web Services (AWS) and Microsoft Azure, Oracle is on the cusp of a significant acceleration in its cloud revenue growth, a factor not yet fully mirrored in its stock valuation.

In fiscal Q4, ended May 31, Oracle's total revenue grew 11% year over year, driven by a 52% year-over-year increase in cloud infrastructure revenue. Oracle has been capitalizing on AI demand, with more than 100 cloud regions online. In March, management stated that it is becoming the preferred cloud choice for AI training and inferencing due to the superior performance and cost of its Gen 2 cloud architecture.

Its growing data center presence, high-speed data transfer capabilities, and power capacity could give Oracle a major competitive advantage in the cloud infrastructure market. The acceleration in its cloud revenue last quarter suggests it could be entering a potent phase of high growth as AI workloads shift from training to inferencing for more sophisticated AI applications.

Management's outlook calls for its total cloud revenue growth (applications plus infrastructure) to accelerate from 24% in fiscal 2025 to surpass 40% in fiscal 2026. This could pull Oracle's cloud growth well above AWS, which hasn't been able to crack the 20% growth level over the past year.

Despite Oracle's faster rate of cloud growth, the stock trades at a forward price-to-earnings (P/E) multiple of 30 at the time of writing, which is lower than Amazon's forward P/E of 34, as well as Microsoft's 35. Oracle stock appears undervalued and could deliver more upside over the next few years.

Image source: Getty Images.

Alphabet Google Cloud A Rising Contender with Strong AI Capabilities

ChatGPT developer OpenAI recently selected Alphabet's Google Cloud (associated with tickers GOOG and GOOGL) for its computing capacity needs, according to a Reuters report. This validates Google's investments in AI and potential to gain share on the cloud leaders. While Alphabet generates most of its revenue and profit from ads, the company's booming cloud business could fuel the stock higher over the next five years.

Google Cloud is currently ranked third in market share behind AWS and Microsoft Azure. But Google has been gaining on the leader, with cloud revenue growing 28% year over year last quarter.

Alphabet credits its cloud momentum to its offering of software for developing AI applications, its Gemini AI model, and the attractive cost performance of its custom AI chips (Tensor Processing Units). Google recently introduced Ironwood, the latest version of its Tensor chip, which is designed for the next stage of AI model development (e.g., inferencing).

Importantly, Google Cloud is now generating more than 7% of the company's operating profit, up from 3.5% this time last year. At this pace of improvement, Google Cloud could contribute around a quarter of Alphabet's operating profit in the next three years or so.

Why is this significant for the stock? The shares currently trade at a modest forward P/E of 18, largely because of Alphabet's dependence on the cyclical advertising market, not to mention increasing competition in search. However, Google's AI investments are an advantage for the company.

Given Google Cloud's momentum, Alphabet is probably the most undervalued cloud stock among the leading hyperscalers, making the stock a compelling buy right now.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.