Let’s play a quick game of “Who said it?”
The quote: “Our aspiration is to have the biggest company in the cloud.”
There are quite a few options these days, with the most obvious candidates being Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and SAP (NASDAQ:SAP). But this quote in particular comes from one of Oracle’s co-CEOs Mark Hurd during a recent media day (hat-tip to Alex Konrad).
Cloud chatter has been especially prominent in the wake of the recent media firestorm about a potential Salesforce.com (NYSE:CRM) acquisition — although Microsoft has arguably been winning cloud shouting matches ever since Satya Nadella took the reins.
But the best paragraph you’ll read about that Saleforce buyout chatter, in my opinion, came from Forbes contributor Jason Bloomberg: “Oracle is the most likely [candidate] — except it’s not. Salesforce’s Benioff had lunch with Microsoft’s Nadella — only perhaps it was dinner. IBM (NYSE:IBM), Amazon.com (NASDAQ:AMZN), or perhaps even SAP are in the mix. Only it’s not SAP. Apple (NASDAQ:AAPL) anyone?”
The point is that the cloud, despite the fact that it’s an indisputable, here-to-stay technology, is fittingly fluffy. The space is full of aspiration and rumors — yet a successful transition to the cloud, especially from an investment perspective, is another.
ORCL Stock Deserves Some Skepticism
Consider ORCL stock for a moment, which is sitting in the red year-to-date and barely pokes into the black if you zoom out to the past 12 months.
It takes only a quick glance to notice the company’s shrugworthy growth prospects. Sure, shares of ORCL stock are currently trading at a forward P/E ratio of 14 — not bad for today’s frothy market. But that discount dulls as soon as you note that annual earnings growth isn’t even expected to hit double-digits over the next half-decade.
The point is that the difference between Oracle’s cloud aspirations and its financial results is stark: Sure, cloud software-as-a-service and platform-as-a-service revenue grew 30% year-over-year in the most recent quarter, followed closely by cloud infrastructure-as-a-service revenue, which boasted a 28% pop.
But those two segments only make up a 4% and 2% slice of the sales pie respectively — much too small to be excited about. (Next time someone asks you for a slice of pizza, give them a 4% slice; see how they react.) Besides, we all know it’s easier to post larger percentage gains on smaller chunks of anything.
That sales mix is just one reason to be wary of ORCL stock. Another comes from the fact that growth in the cloud don’t come cheap. Even that sweet 30% revenue growth from cloud software-as-a-service and platform-as-a-service offerings is soured a bit when you note the fact that it came on 81% growth in operating expenses for the segment. Of course, that spend is also a small slice of the overall operating expenses pie and may just be the result of upfront infrastructure costs — but it’s a dramatic enough figure that it should still be on investors’ radar.
To be fair, ORCL stock does have its perks. Shares have put on a slow-and-steady upwards trajectory for the past decade, as seen in the chart above. Toss in a respectable 1.4% dividend — a 15-cent payout that will have one delicious yield-on-cost if that upward trajectory keeps its pace — and there are definitely worse places to put your money.
And indeed, Oracle has been ramping up cloud investments, as we already mentioned. It recently raised a big heap of money via corporate bonds that could perhaps be used to buy a cloud-focused company. And the company has already spent more than $5 billion per year on research and development and made a number of cloud-focused buys since 2005.
But don’t confuse it for a hot, sexy cloud play.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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