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Oracle Corporation: ORCL Stock Is Stuck in No Man’s Land

A transition to the cloud is savvy, but growth will be squeezed by margins

Oracle Corporation (ORCL) may sound like a slow-moving tech giant, but it has been anything but so far this year.

Oracle Corporation: ORCL Stock Is Stuck in No Man’s LandShares of Oracle stock have gained more than 12% since 2016 kicked off — roughly twice the rise of the S&P 500. Most recently, ORCL stock got a boost after announcing a big-time acquisition: the purchase of cloud-centric NetSuite for a whopping $9.3 billion.

The optimism out of Wall Street came largely thanks to the fact that this deal will be immediately accretive to Oracle’s earnings per share. And while I understand the bull case behind Oracle’s shift to the cloud, it seems to me that the potential growth from that transformation is already built into the stock price.

For background, Oracle is a classic example of a legacy tech company that used to sell its proprietary software directly to customers. As you’ve heard a thousand times before, that model has been disrupted by the rise of cloud computing, which allows for the delivery of such software via the internet.

Already, Oracle has been transforming its company accordingly — something evident increasingly in its revenue mix over the last couple years. And the NetSuite acquisition is yet another step towards becoming more cloud-focused.

NetSuite’s cloud-based business management suite takes care of ERP/Financials, CRM and ecommerce for more than 30,000 organizations.

Challenges for ORCL Stock

Once again, in terms of where there is demand in the market and the ability to compete with cloud companies ranging from Alphabet Inc (GOOG, GOOGL) to, Inc. (CRM), this move makes perfect sense. But from an investment perspective, some trouble is along for the ride.

While “cloud” is a drool-worthy buzzword, the reality is that delivering software that way comes with far lower profit margins than the company’s old, proprietary technology.

This is important, not because it means the transformation isn’t savvy, but because it means the growth being touted isn’t necessarily going to be as substantial as it may sound. And it leaves Oracle stock in a weird no-man’s land where it’s not quite a steady legacy play, but not quite a true growth play either.

This is evident in its middle-of-the-road dividend yield (1.5%) and at its inconsistent growth rates. Already, ORCL stock is trading for nearly 14 times forward earnings.

Looking at the growth rate this year, that seems reasonable, as earnings are on tap to expand by 25%. But the next year, growth tapers off to just 9% — a rate that’s more than built into the stock price considering recent gains.

The takeaway is this: While Oracle stock isn’t a burning trashcan by any stretch, don’t be fooled into thinking this acquisition is enough of a game-changer or enough of a sure-fire bet to make the company worth your time.

Projected growth rates are already built into the ORCL stock price, while the “transformation” is really, when you peel back the onion, proof that Oracle is not just playing catch-up, but being forced to shrink its own margins in the process.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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