Oracle Stock: Leading Database With Huge Cloud Tailwinds (NYSE:ORCL) – Seeking Alpha

Oracle To Report Quarterly Earnings

Justin Sullivan/Getty Images News

Oracle (NYSE:ORCL) is a legacy technology company founded in 1977 and is the third largest software company in the world by revenue. Since going public in 1986, the stock price has expanded by an eye watering 103,000% (according to google share price chart). In 2020 alone, the company had a major rally with their share price increasing by 111%, but since December 2021 the stock has been butchered by an eye watering 29%, along with the broader technology market correction. However, the company is still the market leader in databases with a new offering (MySQL HeatWave) which has received raving analyst reviews. In addition, they are the 8th largest cloud infrastructure provider and taking on the cloud titans such as AWS, Microsoft Azure and Google Cloud with their niche offering. Let’s dive into the business model, financials and valuation for more on this legacy tech company which is transforming.

Oracle stock trend
Data by YCharts

Transforming Business Model

Oracle is a software giant known for its legacy technology business, which includes the wildly popular programming language Java, which they gained after acquiring Sun Microsystems in 2009. Since then the company has expanded to enterprise software and is now a leader in cloud databases. Their business products are currently segmented into three parts:

Oracle Cloud Infrastructure

This offers enterprises all the services they need to migrate, build, and run all of IT, on new cloud native applications. Enterprises are currently going through a “digital transformation” as they aim to set up their IT networks on the cloud. In order to achieve greater flexibility, lower cost and better security. This also gives the ability for companies to bring together multiple data sources and leverage technologies such as AI and Machine learning easier.

AWS, Microsoft Azure and Google Cloud are the three titans of the cloud market. However, Oracle is gaining traction and analyst reports state Oracle could become a cloud leader in the future. Gartner shows AWS still has a higher 4.5 rating vs 4.3 for Oracle, but AWS does have more reviews and the gap is closing.

Cloud Market Share

Cloud Market Share (Statista)

The global cloud computing market size is forecasted to grow from $445 billion in 2021 by a 16.3% CAGR to $947.3 billion by 2026. Oracle is poised to ride this trend with its niche offering and full stack solution. They are currently ranked 8th by global market share with a 2% stake according to Statista.

Oracle Cloud Applications

Oracle Cloud Applications is a suite of SaaS applications which include enterprise resource planning (ERP), supply chain management and human capital management software. They offer very similar products to software giant SAP (SAP) which is their main rival but have also cooperated with in the past.

Oracle Cloud

Oracle Cloud (Oracle website)

Hardware and Legacy Software

This includes physical hardware such as Oracle servers and storage. In addition to on premises applications. Then we have legacy software such as Java and My SQL, the most popular Open Source SQL database management system developed by Oracle Corporation.

New MySQL HeatWave – Best in Class

Oracle’s new MySQL HeatWave database is a real game changer and solves many problems businesses face when analysing data. Generally a MySQL database is slow at running analytics queries and thus companies have to create a separate analytics database for reporting. They then must attach these two databases together through a complex ETL process to (Extract, Transform and Load) data. This is both time consuming, slow and more costly. Whereas, the MySQL HeatWave database allows a single database to be used for storage and real time analytics. The platform also enables machine learning to be run inside MySQL HeatWave without a separate Machine learning database.

Database analysts cited by Oracle state:

“Customers can expect MySQL HeatWave to perform about 7 times faster than Amazon Redshift or Snowflake at 2-5 times lower cost. The benefits over Amazon Aurora are even greater.”

Other analyst reports indicate MySQL HeatWave “melts” competitors such as Snowflake (SNOW) with “unparalleled price and performance advantages”.

Planned Acquisition

Oracle Corp is poised to gain EU antitrust clearance for their planned acquisition of U.S. healthcare IT company Cerner Corp. (CERN) for $28.3 billion, according to Reuters. The acquisition of Cerner Corp. is expected to give Oracle access to a vast amount of data and attract more healthcare clients to its cloud platform as a result.

Growing Financials

For the most recent quarter Oracle announced total revenue of $10.5 billion, up 4% year over year and 7% in constant currency. These numbers may not seem spectacular, but this was actually Oracle’s highest quarterly organic revenue growth since they began their transition to the cloud. In addition, if we analyse segment revenue we see greater growth. For example, total Cloud Revenue (IaaS plus SaaS) reached $2.8 billion, this was up a rapid 24% which is fantastic. While their Fusion ERP Cloud Revenue jumped by 33% and their NetSuite ERP Cloud Revenue jumped 27% year over year. Thus this could be part of a new growth cycle ahead.

Oracle Revenue Estimates
Data by YCharts

Their operating income for the most recent quarter was $3.8 billion. This was mostly stable (down 1% in USD but up 3% in constant currency terms. While their operating margin came in at 36%, which is higher than the historic average. As a software company Oracle has an extremely high gross margin of 79.4% which is even higher than rival software giant SAP which operates at a very high margin of 71.4%.

Oracle vs SAP margins
Data by YCharts

Oracle is in a strong cash position with $22.7 billion in cash and cash equivalents on their balance sheet as of their most recent financial statement. However, they do have an eye watering amount of debt with $72 billion reported in long term debt, according to their most recent financial statement. The chart below shows slightly higher levels of long term debt and this may be including other liabilities. However, If I use this as a comparison to competitor SAP which has long term debt of $14.7 billion, we can see Oracle does have much more. It is “normal” for legacy companies to be highly levered and they can manage their payments very well due to their high margins and cash flow.

Oracle vs SAP debt
Data by YCharts


In order to value Oracle, I have plugged the latest financial data into my valuation model which uses the discounted cash flow method of valuation. I have conservatively forecasted 10% revenue growth per year over the next 5 years, mainly driven by growth in their cloud segment and new database offerings. I have also predicted margins to increase over time due to this same reason.

Oracle Stock Valuation

Oracle Stock Valuation (created by author Ben at Motivation 2 invest)

Oracle R&D

Oracle R&D (R&D model)

In addition, to improve the accuracy of the valuation, I have also capitalised the companies R&D expenses. Which include spending of approximately $6 billion per year.

Valuation model

Oracle stock Valuation model (created by author Ben at Motivation 2 invest)

Given these factors I get a fair value of $70 per share, the stock is currently trading at $72 per share and thus is “fairly valued” according to the model. This is assuming conservative growth estimates moving forward.

The stock trades at a low EV to EBITDA (forward) multiple (11.7) relative to the past couple of years. The stock currently trades cheaper than main rival SAP which trades at an EV to EBITDA (forward) = 12.3. While it is slightly more expensive than legacy tech giant IBM (IBM) which trades at an EV to EBITDA = 10.4.

Oracle vs SAP vs IBM EV to EBITDA
Data by YCharts


Cloud and Database Competition

The major tech titan’s Amazon (AMZN), Microsoft (MSFT) and Google (GOOG) (GOOGL) dominate the cloud infrastructure industry, which means Oracle faces an uphill battle moving forward. The company still has the most popular database offering but disruptive players such as MongoDB are growing rapidly and thus mean competition is strong.

Opportunity Cost

Tech and growth stocks have had a huge correction, mainly due to inflation, rising interest rates and Wall Street’s extra sensitivity to company earnings. We have seen the FAANG stocks, all plummet by substantial levels and thus there are many opportunities in the tech market.

Final Thoughts

Oracle is a tremendous legacy technology company with a strong heritage of technology innovative and acquiring best in class companies such as Sun Microsystems. The company is currently going through a cloud transformation and is poised to ride this growing market trend. The stock price is “fairly valued” at the current levels and thus could be a great long term investment.

Spread the love

Leave a Reply

Your email address will not be published.