ZDNet reported in late February that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) bought approximately $2.1 billion of Oracle (NASDAQ:ORCL) last year between July and September and then promptly turned around and sold all of its Oracle stock in the final three months of the year.
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I read this the other day and couldn’t believe my eyes, so I checked the SEC filings. Sure enough, it was true. Berkshire bought and sold Oracle stock in six months, setting what has to be a record for the shortest holding period in Buffett’s illustrious career.
Too bad Buffett didn’t get second thoughts about IBM (NYSE:IBM). He could have saved Berkshire Hathaway shareholders a whole lot of grief if he had.
So, why did Berkshire sell? Well, Buffett recently tried to explain his rationale.
“After I started buying [Oracle], I felt I still didn’t understand the business. I actually changed my mind in terms of understanding it, not in terms of evaluating it. Oracle is a great business, but I don’t think – particularly after my experience with IBM – I don’t think I understand exactly where the cloud is going,” Buffett told CNBCs Becky Quick on Feb. 25.
If you own Oracle stock, you’re probably questioning yourself after hearing Buffett’s explanation that he didn’t understand Oracle’s business enough to hold it for the long haul.
That’s because unless you work in the technology industry and understand every nook and cranny of Oracle’s business, you might just be taking a big leap of faith. And that’s no way to invest.
The Argument for Selling Oracle Stock
Buffett’s argument against owning Oracle stock is two-fold: he doesn’t understand its business, and he doesn’t know where the cloud is going. Sure, he knows that both Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) are both big players in this area, but beyond them, is ORCL a player or a pretender?
Buffett couldn’t answer this question, so he sold ORCL stock. If you can answer this question, I wouldn’t sweat it. If you can’t, here’s something to consider.
On Mar. 11, Oracle’s top cloud executive, Amit Zavery, joined Google Cloud as a vice president of engineering, reuniting with Thomas Kurian, his former boss at Oracle who now runs Google Cloud. Zavery became the second high-ranking Oracle executive to jump ship since last September, when Kurian left.
ORCL would likely say that Zavery merely wanted to work with his old colleague, and that his departure had nothing to do with Oracle’s place in the cloud world. But others will rightfully wonder if Oracle’s done as much as it can to keep up with Amazon and Microsoft, and if Zavery decided to go to a company [Google] that has an actual chance to catch them.
“While the company is rewarding shareholders with its capital return program, we believe ORCL is significantly underinvesting in R&D compared to peers at the expense of revenue and operating income growth, while also limiting its opportunity to participate in transformative M&A,” wrote Nomura analyst Christopher Eberle prior to the unveiling of Oracle’s third-quarter results in mid-March.
The Argument for Holding Oracle Stock
Oracle announced its third-quarter results on Mar. 14.
It managed to beat analysts’ consensus expectations on both the top line and the bottom line. In terms of revenues, analysts’ consensus estimate was for $9.59 billion. Oracle’s sales were $20 million higher than that. On the bottom line, analysts on average were expecting 84 cents per share. Oracle beat that estimate by three cents.
Naturally, this would lead one to believe that Oracle’s transition to the cloud is gaining traction.
Co-CEO Safra Catz had this to say about Oracle’s cloud business during the Q3 conference call:
“Total Cloud Services and License Support revenue for the quarter was $6.7 billion, up 4% in constant currency, and now accounts for nearly 70% of total company revenue, largely recurring revenue,” he said.
“As in past quarters, we’re seeing robust double-digit growth rates for total cloud revenue in all regions, with especially strong growth in Asia Pacific,” Catz added.
After reading Catz’s statement, it’s hard not to get excited about Oracle’s ongoing transformation, despite the defections of two of its key executives.
The Bottom Line on Oracle Stock
If you were Amit Zavery and you knew that Oracle’s cloud business was working like a charm and gaining market share on Amazon and Microsoft, would you leave your job as ORCL’s top cloud executive?
I sure wouldn’t.
On Friday, March 22, Oracle reportedly laid off several hundred of its employees in various locations around the world, including Silicon Valley. The company said it carried out the layoffs to help Oracle’s Gen 2 Cloud reach its full promise. It says it’s moving resources from old technologies to the new technologies such as the cloud that need them.
Others believe these cuts are the beginning of a bigger set of layoffs that could amount to more than 13,000 employees worldwide.
Warren Buffett’s exit could have been cold feet. However, he’s a pretty smart guy, so it’s possible that he figured out, despite his lack of tech understanding, that Oracle was fighting a losing battle when it comes to the cloud.
The departure of Oracle’s two most senior cloud executives tells me all I need to know about ORCL stock.
My recommendation: Sell Oracle stock and move over to one of the other three cloud providers mentioned earlier.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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