The year 2020 will be remembered on Wall Street as the “Summer of Software.” Because software can be made from home, delivers productivity, and scales in the age of the cloud, every software company looks like gold. Even Oracle (NASDAQ:ORCL) and ORCL stock.
The insanity of the current market is shown by this. Oracle, a slow-growth company with a paltry dividend and only middling prospects, continues to grind higher. It’s up 8% so far in 2020.
At $57 per share, a market cap of $173.4 billion, it trades at 18.4 times earnings. The 24 cent per share dividend yields 1.69%.
Missing the Cloud
Oracle today claims to be a cloud platform with data centers on nearly every continent. But its footprint is small compared to Cloud Czars like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google Cloud.
A decade ago, Oracle and Microsoft were very similar and roughly the same size. Then Microsoft began making its peace with open source, while Oracle went to war. Today Microsoft’s market cap of $1.61 trillion is nine times bigger than Oracle’s, its revenue four times bigger.
Not only did Oracle miss the bus on cloud early in the last decade, it actively resisted the trend. It bought Sun Microsystems for its open source software, then fought to make that software closed source. It won a long legal fight with Google, but open source responded by putting projects inside foundations Oracle couldn’t buy. It maintained a proprietary model that squeezed customers for profits long after that stopped making sense.
Now Oracle is fighting to defend its remaining turf and it’s on the back foot. Oracle dominated the era of “on-premise” databases, servers installed at a company’s offices. The growth is in cloud databases. Oracle insists it can win there, against companies founded by ex-Oracle employees like Salesforce.com (NYSE:CRM).
But founder Larry Ellison, now the fifth-richest person in the world, is selling his shares as fast as he can give them to himself. The share price is maintained by buybacks that are no longer fashionable. Oracle insists it can regain market share, but analysts no longer believe it.
A database is a very complicated thing. The larger it grows, the harder it is to make changes. Oracle has taken advantage of that. Its strength is with governments and large enterprises, who find it easier to keep paying Oracle’s prices than tear out what they have and re-build it.
Oracle grows its bottom line by squeezing these customers, holding down expenses, and with those buybacks. ORCL stock’s share count has fallen by one-quarter over the last four years.
For investors in ORCL stock, this delivers slow and steady growth. The value of Oracle marches ahead by 10% per year. The dividend has risen 60% over the last five years, from 15 cents to 24 cents per quarter.
Analysts usually compare it with SAP (NYSE:SAP), the European database company, which makes it look good. But its real competition today is from nimbler, cloud-based companies like Workday (NASDAQ:WDAY), where the comparisons aren’t as good.
The Bottom Line on ORCL Stock
You may think that, since my last warning about Oracle was on March 6 and it’s up almost 20% since then, I don’t know what I’m talking about. You can make a little money with Oracle. It’s a safe holding, a favorite among conservative institutions.
But Oracle missed the boat on cloud, it missed the trend in open source, and its gains during this summer of software are small. That’s also the best it can do.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.