Oracle Stock: Leading Database With Big Cloud Tailwind (NYSE:ORCL)

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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 gained an eye-drop 103,000% (according to Google stock chart). In 2020 alone, the company enjoyed a major rally with its stock price rising 111%, but since December 2021, the stock has been butchered a staggering 29% along with the broader tech market correction. However, the company still leads the way in databases with a new offering (MySQL HeatWave) that has garnered rave analyst reviews. They’re also the 8th largest cloud infrastructure provider, and their niche offering rivals cloud titans like AWS, Microsoft Azure and Google Cloud. Let’s dive into the business model, finances, and valuation to learn more about this legacy tech company that’s changing.

Oracle stock trend
Data from YCharts

Transformational business model

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

Oracle Cloud infrastructure

This provides businesses with all the services they need to migrate, build and run all IT on new cloud-native applications. Companies are currently going through a “digital transformation” as they want to build their IT networks in the cloud. To achieve more flexibility, lower costs and more security. This also gives companies the ability to bring together multiple data sources and more easily leverage technologies like AI and machine learning.

AWS, Microsoft Azure and Google Cloud are the three titans of the cloud market. However, Oracle is gaining traction and analyst reports suggest that Oracle could become a cloud leader in the future. Gartner shows that AWS still has a higher score of 4.5 versus 4.3 for Oracle, but AWS has more scores and the gap is closing.

Cloud Market Share

Cloud Market Share (Statist)

The global cloud computing market size is forecast to grow at a CAGR of 16.3% from US$445 billion in 2021 to US$947.3 billion in 2026. Oracle is poised to capitalize on this trend with its niche offering and full-stack solution. According to Statista, they are currently in 8th place in terms of world market share with a share of 2%.

Oracle Cloud Applications

Oracle Cloud Applications is a suite of SaaS applications that includes 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 competitor but with which they have also worked 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 like 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 of the problems companies face when it comes to data analysis. In general, a MySQL database is slow when executing analytical queries, and thus companies need to create a separate analytical database for reporting. Then they have to connect these two databases with data (extract, transform and load) through a complex ETL process. This is both time consuming, slow and more expensive. The MySQL HeatWave database, on the other hand, allows using a single database for storage and real-time analysis. The platform also allows machine learning to run within MySQL HeatWave without a separate machine learning database.

Database analysts cited by Oracle state:

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

Other analyst reports indicate that MySQL HeatWave is “melting” competitors like Snowflake (SNOW) with “unprecedented price and performance advantages.”

Planned takeover

Oracle Corp is close to receiving EU antitrust approval for its proposed acquisition of US healthcare IT firm Cerner Corp, according to Reuters. (CERN) for $28.3 billion. The acquisition of Cerner Corp. is expected to gives Oracle access to a large amount of data and will thereby attract more healthcare customers to its cloud platform.

Growing finances

For the most recent quarter, Oracle reported total revenue of $10.5 billion, up 4% year over year and 7% at constant currencies. Those numbers may not seem spectacular, but this was actually Oracle’s highest quarterly organic revenue growth since it began its cloud journey. In addition, if we analyze segment sales, we see greater growth. For example, total cloud revenue (IaaS plus SaaS) hit $2.8 billion, a rapid 24% increase, which is fantastic. While their Fusion ERP cloud revenue grew 33% and their NetSuite ERP cloud revenue grew 27% year over year. Thus, this could be part of an upcoming new growth cycle.

Oracle Revenue Estimates
Data from YCharts

Its operating income for the most recent quarter was $3.8 billion. This was mostly flat (down 1% in USD but up 3% in constant exchange rates). While their operating margin was 36%, which is higher than the historical 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 from YCharts

Oracle is in a strong cash position with $22.7 billion in cash and cash equivalents on its balance sheet at the most recent financial statements. However, at $72 billion in long-term debt, they have a staggering amount of debt, according to their most recent financial report. The chart below shows slightly higher long-term debt that may include other liabilities. However, if I use this as a comparison to competitor SAP, which has $14.7 billion in long-term debt, we can see that Oracle has a lot more. It’s “normal” for legacy companies to be heavily indebted and able to manage their payments very well given their high margins and cash flow.

Oracle vs. SAP debt
Data from YCharts

valuation

To value Oracle, I fed the latest financial data into my valuation model, which uses the discounted cash flow valuation method. I’ve conservatively forecast revenue growth of 10% per year for the next 5 years, driven primarily by growth in the cloud segment and new database offerings. For the same reason, I also predicted that margins will increase over time.

Oracle stock rating

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

Oracle Research and Development

Oracle Research and Development (R&D model)

In addition, to improve the accuracy of the assessment, I have activated the company’s R&D expenses. That includes spending about $6 billion a year.

scoring model

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

Given these factors, I’m getting a fair value of $70 per share, the stock is currently trading at $72 per share and is therefore “fairly valued” according to the model. This assumes conservative growth estimates for the future.

The stock is trading at a low EV-to-EBITDA (forward) multiple (11.7) compared to the past few years. The stock is currently trading cheaper than its main competitor SAP, which is trading at an EV to EBITDA (forward) = 12.3. It’s a bit more expensive than the old tech giant IBM (IBM), which trades at an EV to EBITDA = 10.4.

Oracle vs. SAP vs. IBM EV on EBITDA
Data from YCharts

risks

Cloud and database competition

Big tech titans Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL) dominate the cloud infrastructure industry, which means Oracle faces an uphill battle. The company still has the most popular database offering, but disruptive players like MongoDB are growing fast and therefore mean stiff competition.

Opportunity costs

Technology and growth stocks have seen a huge correction, largely due to inflation, rising interest rates and Wall Street’s particular sensitivity to corporate earnings. We’ve seen FAANG stocks all down significant levels and as such there are plenty of opportunities in the tech market.

Final Thoughts

Oracle is a great legacy technology company with a strong heritage of innovative technology and acquisitions of world-class companies like Sun Microsystems. The company is currently undergoing a cloud transformation and is ready to capitalize on this growing market trend. The share price is “fairly valued” at current levels and could therefore be a great long-term investment.

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