Oracle Corporation (NASDAQ:ORCL) Chairman Larry Ellison may be one of the best trash talkers in Silicon Valley if not in all of corporate America.
During the software company’s latest earnings call, Ellison set his sights on Amazon.com, Inc. (NASDAQ:AMZN), the market leader in the fast-growing cloud market. He noted that Oracle workloads run ten times as fast as Amazon and are cheaper to boot.
“As a result, some of our largest customers’ are negotiating huge infrastructure-as-a-service contracts to move all their databases to the Oracle cloud,” the cantankerous billionaire said. “You can expect some of those big deals to be announced in the coming weeks.”
Of course, he didn’t name any names, nor did he offer any specifics. Investors need to view Ellison’s boasts with skepticism because ORCL is still a small fish in the big pond that is the cloud market.
During its latest quarter, ORCL reported $1.01 billion in cloud software as a service (SaaS) and platform as a service (PaaS), a year-over-year increase of 11 percent. Infrastructure as a service (IaaS) sales were $178 million, up 2 percent.
Total cloud revenue rose 62 percent to $1.2 billion in the most recent quarter and is forecast to slow down to 29 percent in the current quarter. Co-CEO Safra Catz’s has forecast that cloud revenue ($3.2 billion over the past nine months) would overtake license revenue ($3.7 billion during that same time.). The company gave an estimated run-rate for the business of about $5 billion.
AMZN, though, has a huge head start on ORCL as do other rivals. The e-commerce giant’s Amazon Web Services cloud division surged 47% in 2016 to $3.5 billion, indicating a run of about $14 billion. Sales for Microsoft Corporation’s (NASDAQ:MSFT) Intelligent Cloud rose 8% (10% in constant currency) to $6.9 billion in its latest quarter. The Redmond, Wash.-based company has forecast a “commercial annualized revenue run rate” topping $14 billion. International Business Machines Corp. (NYSE:IBM), for its part, reported $13.7 billion in cloud revenue last year.
Keep in mind that these company all likely define “cloud revenue” differently than one another, but even among the most optimistic of scenarios, it appears as though ORCL is in no position to catch Amazon or any other major cloud players for years if ever.
What This Means for ORCL Stock
Does that mean that investors should dismiss Oracle’s cloud boasts? No.
Remember that ORCL has deep relationships with enterprises of all sizes. The company’s database software is what’s known as “sticky” in the tech world, meaning that it would be a huge pain to get rid of it. Chief Information Officers would rather deal with the devil they know, as ORCL is a horned creature with which they know intimately. ORCL will be able to bundle its software and services with cloud offering, driving down the price of cloud services for all.
Moreover, Ellison has never been shy about making acquisitions to “buy” growth in fast-growing areas like the cloud.
Shares of ORCL have been on a roll this year, gaining more than 16%, outperforming rivals such as IBM and MSFT, both of which posted single-digit increases. The shares are trading at about 6% discount to their average 52-week price target of $47.97. Though the valuation isn’t particularly appealing now, the stock might be worth picking up if there is a pullback.
After all, Wall Street has underestimated Ellison for years.
As of this writing, Jonathan Berr doesn’t own any shares of any of the stocks mentioned above.