Which is the better stock to buy, Microsoft Corporation (NASDAQ:MSFT) or Oracle Corporation (NYSE:ORCL)?
Generally, investors begin such an exercise by comparing common valuation metrics such as price-to-sales and price-to-earnings, etc., between the two tech companies in hopes of better understanding each stock’s relative value. Hence the title, “Value Battle”.
After that, you might look at the various operating segments of each business to assess how efficiently it’s growing its business, and more importantly, how profitably. After all, revenue growth without profit growth, is pretty much pointless.
Then you might finish by examining the performance of Microsoft stock vs. Oracle stock over the short-term, medium-term and long-term. By doing so, you get a better idea of each stock’s consistency vis a vis performance. For example, if you can’t stand volatility, you probably don’t want to be invested in a stock that’s up 50% every other year and down 50% in between.
That’s the typical way investors would compare two stocks operating in the same sector such as MSFT and ORCL, and it’s what I would have done had I not recently seen a CNNMoney story about the country’s top paid female executives.
Number one on the list?
Oracle co-CEO Safra Catz who in December was appointed to the executive committee for Donald Trump’s transition team. A player in Silicon Valley, Catz was paid $41.1 million in 2015, a Queen’s ransom by anyone’s standard.
That got me thinking about the value owners of Microsoft stock and Oracle stock receive from their respective CEOs. Why? Because it’s clear by valuation metrics alone that ORCL is considerably cheaper than MSFT with a price-to-earnings ratio that’s 38% less, a price-to-book ratio that’s 52% less and a price-to-sales ratio that’s 25% less.
How Do MSFT and ORCL Stack Up Against Each Other?
At a time when the top CEOs in America make 335 times the compensation of an average American worker, it seems to me that the CEO compensation at the two companies is a good way to further evaluate the relative value of Microsoft stock vs. Oracle stock.
So, here it goes.
The $41.1 million figure for Catz mentioned above is from Equilar data. Payscale.com data puts the number much higher at $53.2 million in 2015. However, if you go to its latest proxy statement you’ll see that it’s more like $125.8 million, including option and stock awards that vested in fiscal 2016. Plus, you have to add the $56 million earned by Mark Hurd, Catz’s co-CEO.
That’s a total of $181.8 million in CEO compensation at ORCL in fiscal 2016.
Over at MSFT, Satya Nadella earned $32.9 million in fiscal 2016 (including vested stock), just 18% of what the two co-CEOs earned over at ORCL, suggesting Oracle stock owners are getting seriously hosed.
Now let’s consider these wages in the context of the top- and bottom-lines.
ORCL’s net income in fiscal 2016 was $8.9 billion on $37 billion in revenue. Therefore, its total CEO compensation is 2.0% of income and 0.49% of revenue. Microsoft’s net income in fiscal 2016 was $16.8 billion on $85.3 billion in revenue. Therefore, its total CEO compensation is 0.4% of income and 0.04% of revenue.
There’s no question those holding Microsoft stock are getting a far better return from Satya Nadella’s pay than those holding Oracle stock are getting from Catz and Hurd. Co-anything rarely works in business; this is a classic example.
Bottom Line on Microsoft Stock vs. Oracle Stock
I could get into a whole discussion about which company is doing a better job competing with Amazon.com, Inc. (NASDAQ:AMZN) for the title of runner-up in the cloud but given I’m not a real down-and-dirty tech geek, I’d probably being doing readers a big disservice, so I’ll steer clear of that discussion.
Suffice to say, while Oracle is the cheaper stock by a country mile, Microsoft’s profits in recent quarters have been growing much more robustly than Oracle’s. Add to this a dividend yield almost double Oracle’s along with CEO compensation that’s far more reasonable and despite the valuation disparity, I have to conclude that Microsoft in the long-term presents better value.
Price is what you pay, value is what you get. Warren Buffett said that and in this instance it definitely applies.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
