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In the Case of Oracle Stock, Boring Does Not Equal Bad

Chris Lau

The solid fourth-quarter results from Oracle Corporation (NYSE:ORCL) put an end to the downside momentum. Even though the company also issued a first-quarter guidance of revenue growing just 1 to 3 percent in the current (first) quarter, favorable valuations and the prospects of the Cloud Services unit will continue drawing investors with a long-term time horizon.

Oracle grew revenue by 3 percent year-over-year in the fourth quarter. Declines in its Cloud and On-Premise Software unit (by 5 percent, to $2.5 billion), hardware (flat at $1.12 billion), and Services (down 1 percent, to $883 million) were offset by the 8 percent growth in Cloud Services and License Support ($6.77 billion in revenue). The company’s cash and cash equivalents totaled $21.62 billion. This gives Oracle the option of buying smaller growth firms in the software and cloud space if an opportunity comes up.

Markets wisely ignored the downbeat guidance because the short-term slowdown is only temporary. Overall revenue will grow as Oracle’s Cloud revenue becomes a bigger part of the total revenue. With costs contained and even reduced, management is forecast earnings-per-share growing, once again, in the double-digits this year.

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Stability From Growing Installations

The value of the revenue stream from Oracle’s installed customer base cannot be stated enough. Customers are expanding their Oracle Cloud and hybrid environment, which leads to higher licensing revenue. Gross margins of 86 percent for the Cloud services is impressive. Management forecasts this figure going even higher. The overall operating margin of 47 percent will edge higher over the next few years.

On its conference call, Larry Ellison highlighted the feature additions coming to its database solution:

“We will have our simple trends autonomous transactional OLTP system, we will call – or a combination of OLTP and data warehouse integrated coming out in the next month, or so. And then, a couple months after that, we’re going to have the high-performance, high-reliability OLTP system coming out. So some of the autonomous features are coming out at a more rapid rate than some of the more mature features in the database.

And since demand for data storage and analytics keeps growing every year, Oracle is well-positioned to strengthen sales as it adds higher performance to its core products.

ORCL Stock Valuation

With Oracle’s stock trading at a price-to-earnings ratio of 18.3 times and its forward multiples at below 13 times, value investors are getting shares at a steep discount. Microsoft (NASDAQ:MSFT) is pricing in the impressive growth of cloud solutions, namely Office 365 and Azure, assigning a P/E of 28 times for the stock. At the other end of the valuation spectrum, Salesforce.com (NYSE:CRM) is valued at triple-digit multiples, albeit that is deserved. Salesforce empowers its customers to manage its customers effectively. The installation of the product is very easy and the tools offered are so valuable that customers often upgrade to get them.

Oracle’s revenue model may not lead to growth that is comparable to salesforce.com or Microsoft but the long-term revenue growth in the 7 percent level, year after year, suggests that ORCL stock could appreciate further.

Since Oracle’s revenue growth is predictable, investors may use a 5-Year DCF Revenue Exit model to estimate the stock’s fair value is over $50 a share.

Takeaway on ORCL Stock

Corporations continue to shift their on-premise technology solutions to the cloud. Oracle, which runs the majority of the world’s databases, will continue growing its licensing revenue as this happens. Though revenue growth is “slow” at the single digits, it will pick up in pace over the next few years. At this price level, boring does not mean bad for Oracle stock, especially when investors get to buy a stock that is likely to go up in the long-term.

Disclosure: At the time of writing, the author does not own shares in any of the companies mentioned.

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