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Can Oracle's share price climb continue without accelerating its cloud ambitions?

California-based computer technology company Oracle [ORCL] has seen its stock continually rise since the start of the year; at $54.52, it’s at an all-time high and is up 20.57% so far this year as well as 19.04% year-on-year. 
 
With a market cap of $186bn, the company is a dominant force in the industry, trumping competitors Salesforce [CRM] and VMware [VMW] for size, but could it be doing more to capitalise on the cloud component of its service?
 
 
After its Q3 earnings release on 14 March, shares fell some 4%, as the Redwood City company reported weak sales growth – certainly weaker than analysts had expected – though the stock has since rebounded and is now moderately up by 2.77% since then.  
 
The stock suffered that dip despite Oracle beating earnings estimates for the quarter by roughly $0.03 per share, according to Refinitiv, and meeting its own forecasted expectations. 
 
Similarly, revenue was $9.61bn compared to the $9.59bn expected by analysts, according to Refinitiv. Despite meeting revenue expectations, most analysts have a ‘hold’ rating on the stock; out of 37 analysts, 21 have agreed that the share price is a ‘hold’, a prevailing rating that’s stuck since September of last year, while 10 suggest ‘buy’. 
 

The cloud computing company has been consistent in posting impressive margins, giving Oracle an attractive operating margin of 35.90%. To put that into context, cloud competitor Salesforce has a margin of just 4.23% TTM. 

35.90%

Oracle's operating margin

The company’s profit margin is a robust 27.26%, which means that investors get a healthy slice of earnings, with EPS coming in at 2.79 TTM due to a payout ratio of 27.54%.
 
Furthermore, there are few perceivable challenges facing the company’s income streams, making the stock a generally safe bet with plenty of upsides. 
 
 
A growing cloud computing network  
 
In 2018, Oracle acquired the very first cloud company – NetSuite – for a massive $9.3bn. Since then, it has benefited from $1bn in revenue incrementally, with the favourable tie-up contributing to the company’s recent all-time highs set in March and April.
 
“I believe this acquisition was very beneficial to ORCL as their cloud applications were very complimentary and works well together. In addition, the company expects the acquisition to be immediately accretive to ORCL's earnings during the first fiscal year post-close,” a Seeking Alpha article said.
 
 
Market cap$187.87bn
PE ratio (TTM)19.69
EPS (TTM)2.79
Return on Equity (TTM)29.95%

Oracle stock vitals, Yahoo finance, 23 April 2019

 

The global cloud market hit $250bn in 2018 and Oracle’s revenues are gradually increasing from this rapidly growing sector, with 20-25% of its software sales attributed to cloud products in the most recent quarter. 

However, the company will need to move quickly to grow this area of the business as faster-moving rivals, namely Salesforce, are gobbling up market share, with its cloud software revenue expected to double by 2020.
 
Danie Martin writes in The Street: “The favourable secular and long-lasting trends in cloud services are most likely to make winners out of the bolder, higher-growth players that are better able to capture a bigger slice of a growing pie. In this context, Salesforce appears to be much nimbler than Oracle and better positioned to sustain its double-digit revenue growth rates going forward. 
 
“The San Francisco-based tech company is still in the early innings of ramping up its platform, marketing and commerce cloud offerings, each of which has been growing organically at a pace of at least 30% year-over-year.
 
“Oracle seems to be executing well on its less ambitious strategy (i.e. a slow transition away from its legacy hardware and software businesses), and the stock's de-risked valuation may draw the attention of more conservative investors. But with respect to total long-term return on investment, it seems more likely that a bet on Salesforce at current levels should lead to better results, given the company's more encouraging prospects.”
 
 
A value giant   
 
Even so, Oracle expects an improved performance in 2020, despite Amazon’s [AMZN] plan to move away from the company’s software next year, and so coupled with its comparatively low price-point of $54.62, it’s easy to see why investors might be encouraged. 
 
Indeed, Oracle’s cash flow and valuation remains below the likes of its competitors, but its earnings multiple suggests its stock is likely to be at the beginning of a longer spike, according to Seeking Alpha: “Oracle's valuation is well below the selected peer group in terms of cash flow and earnings multiple. Granted, Oracle is growing significantly slower than the peer group, they are not getting enough credit in terms of their multiple. At these levels, it does not seem likely that Oracle, a $40bn tech giant, will trade at a larger discount.
 

“At these levels, it does not seem likely that Oracle, a $40bn tech giant, will trade at a larger discount” - Seeking Alpha

 
“Assuming EPS grows double digits next year and we do not see Oracle's multiple expand at all, the stock should still perform pretty well. Investors could see even more upside if revenue growth re-accelerates and their multiple begins to expand as investors gain more faith in the company.
 
Oracle’s next quarterly report will be announced in June, where a clearer picture of the company’s cloud exploits might emerge. In the meantime, the stock appears set to rise, as the Seeking Alpha expert writes: “Over the long term, Oracle will continue to provide consistent cash flow and earnings, something investors appear to discount because of their slower top line growth. In a world of growth tech names, Oracle is a value giant that investors should not write off.”

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