Oracle (ORCL) stock has not been a great investment in 2015, falling almost 20% year-to-date. Those losses got worse after ORCL fell 6% in the two days following fiscal second-quarter earnings.
Nevertheless, many on The Street are predicting ORCL as a comeback stock next year, calling it a great investment opportunity due to its initiatives in the cloud.
However, before investors buy this so-called value investment, there is one thing you must consider about Oracle stock.
What You Need to Know About ORCL Stock
The bottom line is that Oracle’s cloud business is not the thriving business that many investors thought.
Yes, Oracle’s cloud revenue rose 26% in constant currency to $649 million in its last quarter, with its software-as-a-service (SaaS) and platform-as-a-service (PaaS) revenue up 34% to $484 million. This SaaS/PaaS business is where ORCL is finding cloud growth, expecting to sell and book $1.5 billion of new SaaS/PaaS business this year.
Furthermore, ORCL says that billings increased 68% and bookings rose 75%, which will drive accelerated revenue growth in SaaS/PaaS over the next two quarters, respectively.
That said, ORCL management has bragged over the last three quarters that its SaaS business is growing faster and booking more revenue than its two biggest competitors, Salesforce.com (CRM) and Workday (WDAY). This has created some degree of optimism among investors.
While this all sounds great, Oracle stock owners must realize that ORCL’s SaaS/PaaS growth is coming at the cost of its on-premise business. When SaaS/PaaS bookings rise, Oracle’s software license revenue falls. When its recurring SaaS/PaaS business grows, its license update business suffers.
Importantly, ORCL was somewhat late to the SaaS/PaaS party, which is why ORCL is prioritizing bookings over revenue to investors at this point in time, trying to sell investors on the idea that bookings will translate to revenue over time.
Nevertheless, SaaS/PaaS revenue rose a total of $123 million during its last quarter. However, software license revenue in its on-premise business fell $368 million during the same quarter, thereby illustrating that Oracle is losing much more than it is gaining.
Furthermore, there is not a great deal of seasonality to Oracle’s business, so if the company’s $368 million in on-premise software license revenue losses is consistent quarterly, then ORCL is losing in one business what it hopes to book in another.
Also, CRM and WDAY do not have a multibillion-dollar on-premise license and update/support business to piggyback the performance of their respective SaaS businesses. This means that CRM and WDAY are collecting the industry’s growth, obtaining new revenue whereas ORCL is simply holding on to what it already owned.
Where’s the Value in Oracle Stock?
When you look at what is happening at ORCL, and realize the lack of actual growth that’s taking place, there does not seem to be much upside in Oracle stock price at 17.5 times earnings.
While Oracle claims that margins are higher for its SaaS/PaaS business long-term, with the majority of the costs realized at the time of bookings, it takes time to realize equal revenue versus its older licensing business. Citi’s Walter Pritchard published research earlier this year that claimed it could take ORCL five years to realize as much revenue from cloud database subscriptions as database and financial software licenses. Further, Pritchard claims it would take ORCL up to 10 years to match CRM software. These are some of Oracle’s biggest businesses.
Hence, the margins may be higher for SaaS/PaaS, and ORCL may realize high bookings, but it is going to take a while for those bookings to become realized revenue and profits.
As a result, Oracle investors must have a very, very long investment outlook to own Oracle stock, making ORCL best for dividend investors instead of those seeking stock upside. But with Oracle stock paying a yield of just 1.6%, it is not a very good dividend investment either.
All things considered, it is hard to imagine the Oracle stock price going too much higher in 2016, and it could go significantly lower once stock owners realize how long it will take the company to realize bookings as actual revenues and profit.
As of this writing, Brian Nichols did not own any of the aforementioned stocks.
