Should I Buy ORCL Stock? 3 Pros, 3 Cons


On the heels of its fiscal third quarter results, Oracle (ORCL) shares fell about 3% before climbing back to where it ended yesterday.

orcl-stock-oracleThe company missed Wall Street expectations on both the top and bottom lines. In the quarter, revenues increased 4% to $9.31 billion and adjusted earnings came to 68 cents per share, up about 5%. Yet the analysts’ consensus was for revenues of $9.36 billion and earnings of 70 cents per share.

But for the current quarter, ORCL’s guidance was in line with expectations. The company forecast revenues increasing by 3% to 7% and earnings at 92 cents to 99 cents per share. The consensus was for revenue growth of 5% and earnings of 95 cents per share.

While this is far from inspiring, maybe ORCL be in the midst of a turnaround over the next year or so? To see, here’s a look at the pros and cons of ORCL stock:

ORCL Stock Pros

Massive Global Platform: Founded in the mid-1970s, ORCL has always found ways to adapt and even prevail against the competition. CEO and co-founder Larry Ellison is a legend in the software business. He has a strong understanding of strategy and is not afraid to make big bets. For example, he has spent billions on acquisitions over the years. The result is that ORCL has a huge footprint, with a base of about 400,000 customers, including all of the Fortune 100.

Cloud, Big Data and Hardware: ORCL has been making headway in all of these crucial businesses. For example, the company grew cloud subscriptions by 24% to $292 million in the latest quarter. The company has been aggressively buying up companies in the space, but has also rewritten lots of the existing code base. The Big Data segment, which includes Exadata, Exalytics and Business Intelligence software lines, posted more than 30% growth in Q3. And finally, the hardware segment is getting things into gear. In the quarter, revenues increased by about 10%, thanks partly to competitors leaving the category.

Financials: ORCL is a cash machine. During the last four quarters, free cash flows increased by 11% to $14.4 billion. In all, there is $37 billion in the bank. With all this cash, the company has been buying back lots of ORCL stock — repurchases came to about $10.7 billion in the past year. The company has also used its cash for its aggressive M&A program.

ORCL Stock Cons

Growth: Growth has been meager for ORCL. For the past ten quarters, revenue  growth has been under 5%. Unfortunately, there aren’t many signs that things will get better. After all, China is showing weakness, which could spread throughout Asia. Besides, many of ORCL’s markets are saturated. So to get new business, it often means snagging customers from rivals. But this can be time-consuming and expensive, and won’t help ORCL stock any time soon.

Disruption: Even though ORCL has made lots of progress with the cloud and Big Data, the company’s core business is still heavily dependent on legacy technologies. In other words, nimble competitors like Workday (WDAY), (CRM) and Splunk (SPLK) are likely to keep taking business away from ORCL. In fact, it looks like the prized database business could be in jeopardy. A new kind of technology, called noSQL, appears to be much better at handling the kinds of needs companies have nowadays. Some of the main players in the space include Couchbase, Datastax and MongoDB.

NSA Scandal: The impact from the NSA scandal is far from clear. But it could be a problem for ORCL. Countries in Europe and Asia are getting concerned about the privacy of their data. So perhaps those countries will set policies that will give advantages to home-grown tech companies? It certainly seems possible. Actually, companies like IBM (IBM) and Cisco (CSCO) have noted that they’re feeling pressure on this front.

ORCL Stock Verdict

ORCL stock has been a laggard for the past year, with the gain a mere 2%. Then again, the company has had to deal with major transitions, such as cloud, Big Data and even database technologies. So far, ORCL has been proactive in dealing with these trends.

But unfortunately, growth has remained sluggish. What’s more, there are no obvious catalysts to get things back on track.

And right now, ORCL stock only has a dividend of 1.3%. That’s definitely on the low end given the company’s strong cash flows.

So should you buy ORCL stock? No — for now, it looks like the growth will remain muted for some time.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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