Oracle Corporation (NYSE:ORCL) is one stock bucking the trend of negative market sentiment right now.
ORCL stock rallied last week in large part because Credit Suisse issued a largely bullish note on the company’s cloud future. Analysts at Credit Suisse believe the market is under-appreciating Oracle’s growth potential in the cloud market.
The Oracle Growth Story Is Pretty Good
Although cloud market leaders Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM), and Alphabet Inc (NASDAQ:GOOG) get all the hype, Oracle’s cloud growth story has actually been equally impressive.
Oracle reports its cloud operations through two major segments: Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) plus Infrastructure-as-a-Service (IaaS). In both of those segments, revenues were up at least 60% in fiscal 2017. Cloud SaaS revenues jumped 68% in fiscal 2017, while cloud PaaS and IaaS revenue grew 60%.
The robust cloud growth narrative was more than enough to offset flattish growth in software licenses updates and sizable declines in the new software licenses business. Overall, cloud plus on-premises software revenues rose 5%. That growth was more than enough to offset hardware revenue declines. Overall, total revenues rose 2% last year.
With ORCL, investors are seeing exactly what they want to see from a company in transition. The cloud business is growing more quickly than the rest of the business is declining. The net result is that revenues, operating profits, and earnings are all growing even in this transition period.
Management is confident this growth will continue. The company surpassed $2 billion in annually recurring revenue (ARR) bookings for fiscal 2017. Oracle CEO Mark Hurd said in the Q4 press release that the company will “sell a lot more than $2 billion in new cloud ARR in fiscal year 2018.”
Meanwhile, Oracle Chairman Larry Ellison pointed to AT&T Inc. (NYSE:T) as an example of the growth potential ahead. The telco giant announced they were migrating thousands of existing Oracle databases to the Oracle Cloud. Ellison said that he expects more of Oracle’s big customers to make a similar transition over the next year.
Overall, the Oracle cloud growth story is pretty good. Meanwhile, the stock is only trading at 11.5 times forward-earnings after backing out the company’s $66 billion cash balance. That is a pretty low multiple for a cloud growth stock. The Street only sees 9% earnings growth over the next 5 years, and that also seems pretty low given the cloud-based nature of ORCL’s growth.
So why not buy ORCL stock now?
The Oracle Cloud is Small… So Let It Mature
Well, Oracle’s big growth is from a small base.
Just look at this infographic from Synergy Research Group. The Oracle Cloud is growing faster than the market average, but its also far smaller than most formidable players in this market. And some of those players that are bigger than Oracle are actually growing at a faster rate.
From this standpoint, investors may want to let the Oracle Cloud mature before extrapolating current growth rates into the future. This is especially true considering it looks like the cloud market is consolidating. According to Synergy, the big four cloud players (Amazon, Microsoft, IBM, and Alphabet) gained 5% market share over the past 4 quarters. The “Next 10” (which include Oracle) lost 1% market share.
Also, this article from The Register is of concern. It basically says that big Oracle Cloud growth right now is being driven by aggressive sales tactics and a lot of one-time deals. Those deals aren’t being renewed, according to customer success managers, and that means growth could fall flat soon.
Bottom Line on ORCL Stock
If you believe that more big customers are going to migrate to the Oracle Cloud, then I would understand why you’re buying ORCL stock here. Its cheaper than other cloud players. Growth estimates look tepid and ripe for upward revision if cloud growth continues to impress. Plus, there is a whole bunch of cash on the balance sheet, and that allows for the “growth through acquisition” narrative to continue to play out.
But I’m not going to bite just yet. Instead, I’m going to play the waiting game on ORCL stock.
I want to see that this big cloud growth is repeatable on a bigger base. Cloud market consolidation and a reportedly large number of one-time deals have me concerned that 2017’s big cloud growth won’t repeat in 2018.
In sum, I’ll wait for more proof that Oracle Cloud can grow into perpetuity before buying the stock.
As of this writing, Luke Lango was long on AMZN and GOOG.
