Oracle (ORCL) Stock Doesn’t Offer Much Bang for the Buck

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Its not that I don’t like Oracle Corporation (NSYE:ORCL) stock. It’s just that I don’t see any captivating reason to buy ORCL stock right now. 

ORCL stock
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Yes, it’s cheap. But it has always been cheap, so why is that going to change?

Yes, it has a hyper-growth cloud segment. But the cloud growth story is slowing, so why should I price in robust growth into perpetuity?

Yes, earnings are growing. But they haven’t grown all that much over the past 5 years, so why will they all the sudden increase at a healthy rate for next 5 years?

I just can’t find a compelling reason to buy the name. It’s stuck in no-man’s land in terms of valuation (trades in line with the market after considering growth potential), and there are some serious questions when it comes to the longevity of its cloud growth narrative.

So why buy ORCL stock?

Don’t.

Oracle Wins in a Hybrid Future

The one big positive about Oracle Corporation is that the company is a big winner in a hybrid cloud-dominated world.

Hybrid cloud is essentially a cloud computing environment that comprises a mix of on-premise, private cloud and public cloud services. ORCL wins here because the company pulls most of its revenue (almost 68% last year) from the sale of on-premise software.

The dynamic here is a little more complex than that. New software is in decline. Customers don’t need to sign up for any new software because they are migrating to the cloud. New software accounted for about 17% of ORCL revenue last year.

Revenue from software license updates, however, is growing. Oracle customers that are migrating to the cloud aren’t out-right ditching their on-premise ORCL software. They are deploying a hybrid cloud which integrates Oracle cloud with on-premise ORCL software. Software license updates accounted for about 51% of revenue last year.

Into the foreseeable future, then, Oracle’s cloud business (almost 13% of revenues last year) and its software license updates business should continue to grow. This means a majority of the revenue base at ORCL has a promising growth trajectory over the next several years.

But that is where the good news ends.

Slowing Cloud Growth

The rest of the business (new software and all hardware) is in a secular decline. Overall, revenues rose just 2% last year and 7% this past quarter.

And that is with super-charged cloud growth of 60% last year and 50% last quarter.

This cloud growth rate is expected to slow to 40% next quarter. That is a pretty big drop-off this early in the business. The 60% to 50% to 40% trend in cloud growth rates is similar to what Amazon.com, Inc. (NASDAQ:AMZN) is experiencing, but Amazon Web Services just had a $4.1 billion quarter.

Oracle Cloud just had a $1.5 billion quarter.

In other words, the growth in Oracle Cloud is slowing down a lot sooner than it should. The big growth rates of 40% and higher aren’t here to stay.

That is a big problem, because the rest of the business doesn’t exactly scream long-term growth potential.

Bottom Line on ORCL Stock

Lets get to the numbers.

ORCL stock trades around 16.4 times forward earnings. Earnings growth over the next 5 years is pegged at 9% per year. A 16.4 multiple on 9% growth is a price-to-earnings/growth (PEG) ratio of about 1.8.

The S&P 500 trades around 17.7 times forward earnings. Earnings growth over the next several years is pegged at 10% per year. A 17.7 multiple on 10% growth is a PEG ratio of basically 1.8.

So ORCL stock gives you as much bang for your buck as the S&P 500, which many investors fear is overvalued at current prices.

In other words, there isn’t any positive asymmetry to owning ORCL stock at these levels. This is especially true considering the 9% multi-year growth rate is seriously at risk due to the rapid slowdown in the cloud growth story.

All in all, I’m still waiting on the sidelines with ORCL stock.

As of this writing, Luke Lango was long AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/oracle-orcl-stock-doesnt-offer-bang-for-buck/.

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