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Oracle (ORCL): Value In A Sea Of Excess

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Daniel Laboe
·5 min read
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Value is hard to come by in this euphoric market. Overzealous investors & traders have sent the best-positioned tech giants to the height of their intrinsic value. Oracle (ORCL) may be the diamond in the rough you have been looking to add to your portfolio.

ORCL has been a stock of consistency but little topline growth over the last decade. This may all be changing as this legacy tech giant begins its transition towards the cloud. Oracle is a little slow to the cloud party, but luckily this space still has legs to run through the Roaring 20s.

Adobe (ADBE) and Microsoft (MSFT) are both legacy software players who had experienced slow to negative sales growth for years before their cloud offering took off in recent years. These enterprises' successful cloud transition led to a resurgence in sales growth and not to mention an enormous share price tailwind. In the past 5 years, MSFT has driven over 280% while ADBE has provided returns north of 400%.

Now it would appear that it's Oracle's turn to get its cloud offering off the ground. From its latest earnings report last night, it would appear that the company is on track for a successful cloud transition, but it is still years behind its cohorts.

Earnings & Cloud Opportunity

Oracle is still in transition mode, and that means that it needs to shed its legacy shell before coming out of its transformative cocoon as a cloud butterfly. The company reported earnings after the bell on Thursday, and it beat both top and bottom-line estimates, showing growth for the first time in 2020.

Its Gen2 Cloud Infrastructure and Autonomous Database revenues surged over 100%, while its Fusion & NetSuite Cloud ERP applications sales saw growth of 33% and 21%, respectively. Despite these significant cloud gains, Oracle could only demonstrate 1% year-over-year sales growth as it saw declines in its legacy operations like on-premise licensing and hardware.

Oracle is making giant strides to hyperscale its cloud capabilities with 13 new datacenters in 2020. The enterprise now has 29 datacenters worldwide, which outpaces the cloud king AWS. Oracle is making up for its slow cloud-adaptation with an extremely aggressive global growth strategy.

It's looking to be a major competitor in the race for cloud dominance, fighting in the ring with cloud giants like Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL), who have had control of the IaaS and PaaS cloud markets for years. The business has a broad portfolio of cloud offerings with a robust set of customers, including T-Mobile (TMUS), Equinix (EQIX), and First Solar (FSLR).

According to Research and Markets, cloud computing is a $371.4 billion market this year and will grow to $832.1 billion by 2025, illustrating a compound annual growth rate of 17.5%. A tremendous opportunity for those businesses savvy enough to be holding market share in any part of this vast space.

The Fundamentals

Oracle has yet to prove to the markets that its cloud technology will flip its slow-growth narrative, and this is reflected in its far below industry average valuation multiple. ORCL is trading at a 13.5x forward P/E, which is far below its tech competitors like MSFT at 30x, GOOGL at 29x, and ADBE at 42.5x.

ORCL has underperformed in recent years, reflecting its mature market orientation, but it is flipping the switch on growth with an aggressive cloud growth strategy.

I see ORCL as a low-risk investment with the opportunity for a sizable return if it can successfully transition to the cloud. It is taking the right steps to take market share in one of the fastest-growing tech sectors.

The risk is low because the company is trading at such a low multiple (comparatively) and will continue to maintain its core profit turning businesses as it grows out its cloud offerings. It looks to be following the same trajectory as ADBE and MSFT, just a few years late.

Final Thoughts

ORCL is one of the few equitable value plays left in the seemingly overextended tech market. This stock has strolled along below the broader market's returns over the past 5 years, but it might be its time to shine. Its 1.6% dividend is the icing on the cake for you apprehensive investors out there.

I'm not suggesting a massive ORCL allocation, but I believe it a stock worth holding in your portfolio.

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TMobile US, Inc. (TMUS) : Free Stock Analysis Report
Oracle Corporation (ORCL) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
First Solar, Inc. (FSLR) : Free Stock Analysis Report
Equinix, Inc. (EQIX) : Free Stock Analysis Report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Adobe Inc. (ADBE) : Free Stock Analysis Report
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