The bull case for Oracle stock is largely based on it taking a path similar to that of Microsoft, albeit in the enterprise space. Just a few years ago, Microsoft had been left for dead. It was a giant whose best days were behind it, and whose smaller, nimbler competitors were circling. But Microsoft has reasserted its dominance, played ‘catch-up’ in a few key areas (notably cloud) and MSFT stock has risen more than 240% over the past five years.
The bear case is that Oracle’s next few years will look like the last few at International Business Machines Corp. (NYSE:IBM). The company simply hasn’t been able to overcome secular changes to its business model. In a roaring market for tech, IBM stock is down more than 21% over the past five years — though including dividends investors roughly would have broken even over that time frame.
There’s an argument for both sides. As often is the case, the results likely will fall somewhere in the middle. But at the current price just north of $50, it seems wisest to take the long view — and the long side — of Oracle stock.
Why Oracle Stock Is the Next IBM
When it comes to ORCL, the clear concern is that the transition to cloud is leaving Oracle behind. Similarly, the shift away from hardware has led IBM to struggle, with revenue dropping for 22 straight quarters before growth finally arrived in Q4.
Those concerns have pressured Oracle stock of late. I thought a fiscal first-quarter beat back in September made ORCL a buy — but analysts instead focused on concerning guidance relative to cloud sales, and ORCL stock fell. InvestorPlace’s Tom Taulli detailed the same pattern after the Q2 report in December.
Oracle’s positioning relative to the cloud business is already a problem. Oracle already is behind Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft in as-a-service revenue. It’s even trailing IBM on that front.
But that’s not the only risk for Oracle stock.
The risk is that cloud providers like Amazon are looking to undercut Oracle’s database business. So is relatively new competitor Mongodb Inc (NASDAQ:MDB), whose 9x EV/revenue multiple suggests investors see some promise. Better artificial intelligence offerings only add to the pressure.
The short version of the bear case here is that the world simply is moving away from Oracle. Growth already is decelerating — revenue grew just 6% in Q2, for instance — and it will get slower still.
In a worst-case scenario, sales could turn negative, as was the case at IBM for over five years.
Why Oracle Stock Is The Next Microsoft
The bull case for Oracle is that it still has time to meet its challenges — and that those challenges are overwrought. Soon after the New Year, ORCL stock slipped after a report that Amazon and salesforce.com, inc. (NYSE:CRM) were looking for alternative database providers for their own use.
But that fear had been directly addressed by no less than Oracle Chairman and CTO Larry Ellison on the Q2 conference call the month before — and somewhat angrily so. He pointed out that Amazon wasn’t leaving — and nor was salesforce.com: “Our competitors, who have no reason to like us very much, continue to invest in, and run their entire business on, Oracle,” he said in the Q&A. Even SAP SE (ADR) (NYSE:SAP) has tried, and failed, to develop its own product.
As for cloud concerns, Ellison argued that Oracle’s cost of ownership was far less than that of Amazon. And revenues have grown nicely of late. Cloud revenue rose 44% in Q2, and 51% in Q1. And according to management at an event this month, very few existing customers have moved away from On-Premise — leaving a large base for growth going forward.
That base was a big driver of Microsoft’s recent success. Shifting existing on-premise customers of, say, Office to Office 365 didn’t just move revenue. It grew revenue — and helped margins. If Oracle has the same opportunity in front of it, it too should be able to drive consistent growth over the next few years.
ORCL Looks Cheap
Which side is right?
In the quickly changing tech world, it’s too early to tell definitively. But with ORCL stock range bound since June, and looking reasonably cheap, it seems a wiser bet to take the bullish side.
After all, Oracle doesn’t need that much growth to support the current valuation. The forward P/E is 16x, and a tick lower when considering the company’s $2+ per share in net cash.
Oracle hasn’t detailed its plans for tax reform, which wasn’t a certainty as of the Q2 call. But the company held over $47 billion overseas as of the end of fiscal 2017. That windfall isn’t quite the same as what Apple Inc. (NASDAQ:AAPL) will enjoy, but it does give Oracle a number of options to drive value against a $208 billion market capitalization.
At a low earnings multiple, the market is pricing in a big possibility that growth here simply will come to an end. And that just looks too conservative. If the question is whether Oracle is the next Microsoft or IBM, one part of the answer is that there’s then a lot more upside than downside.
In other words, Oracle looks more like Microsoft than IBM at the moment, and right now, ORCL is cheap enough to risk it.
Consistent growth and an expanding earnings multiple easily could get ORCL toward $70 (think $3.50 in FY20 EPS at a 20x multiple). Flattening growth suggests a stock price maybe into the 40s (12-13x $3+). And something in the middle likely still drives some upside over time, with a 1.5% dividend yield likely to increase soon.
All told, there’s enough here to take a flyer at the current price.
[Editor’s note: This article has been edited to correct a mistake that attributed the title of Oracle CEO to Larry Ellison.]
As of this writing, Vince Martin has no positions in any securities mentioned.