Is Oracle a Bet on the Cloud Worth Taking?

InvestorPlace’s Louis Navellier recently suggested that Oracle’s (NASDAQ:ORCL) push into the cloud should help ORCL stock to continue moving higher.

The Oracle (ORCL) sign hangs on an Oracle office in Deerfield, Illinois.
Source: Jonathan Weiss / Shutterstock.com

Up 40% in the past six months and 61% over the past year, I’m not sure it’s the best short-term or long-term bet on the cloud. 

Here’s why.

Oracle’s Cloud Offerings and ORCL Stock

Search for the word “cloud” in Oracle’s latest 10-K ended May 31, and you get 468 results. Clearly, Oracle focuses on this growth area, which Navellier points out is expected to grow to more than $1 trillion annually by 2026. 

Were Oracle to gain a 1% market share that would be worth $10 billion in annual revenue. If included in its 2021 results, the cloud would account for 29% of its overall revenue. 

But this is where it gets murky if you’re new to Oracle. 

While Navellier points out that Oracle Cloud has an annualized run rate of more than $2 billion, he also highlighted that 85% of its Q4 2021 revenue was cloud-related. So, on an annual basis, it works out to 84% of its overall revenue.

This is what drives me nuts about tech companies. They absolutely do a terrible job of breaking down their revenue streams. The $2 billion number Navellier refers to was mentioned by CEO Safra Catz in its Q3 2021 conference call. She said:

Infrastructure cloud services now have an annualized revenue of more than $2 billion, including OCI consumption revenue, which was up 123%. Autonomous Database was up 55%. Cloud customer consumption revenue was up over 200% but on small numbers.

According to the Q4 2021 conference call, the company’s infrastructure cloud services had an annualized run rate of $2.3 billion, or 15% higher than in the previous quarter. 

That’s good growth, but it represents just 5.7% of its overall 2021 revenue. Where does all the other cloud revenue come from? Good question. I’m glad I asked.

Oracle’s License Support Revenues

Cloud Services and License Support is the largest of Oracle’s four revenue streams, accounting for 71% of its revenue. But when you look more closely at the definition of this revenue, you realize a whole whack of things is included in this large number.

“[L]icense support revenues, which are earned by providing Oracle license support services to customers that have elected to purchase support services in connection with the purchase of Oracle applications and infrastructure software licenses for use in cloud, on-premise and other IT environments,” states Page 36 of its 2021 10-K.  

So, what is the breakdown between cloud, on-premise, and other IT environments? Anybody? 

According to an article in March from Cloud Wars, Oracle generated $1.65 billion in Q3 2021 cloud revenue in the third quarter for 40% year-over-year growth. That works out to $470 million in growth over four quarters. Based on $120 million per quarter, this means its Q4 2021 cloud revenue was $1.77 billion. 

Annualize that, and we’re talking $7.1 billion or 17.5% of its overall 2021 revenue of $40.5 billion. 

That’s good, but not Microsoft (NASDAQ:MSFT) good. 

The Bottom Line

In January, Piper Sandler analyst Brent Bracelin suggested that Microsoft’s Azure cloud business would become the tech company’s largest source of revenue by the end of 2022. 

According to the analyst, Azure contributed $7.2 billion of revenue in Q2 2021, good for 17% of its $43.1 billion in overall sales. Based on $168.1 billion in annual revenue, Microsoft Azure generated $28.6 billion in full-year sales, 4x larger than Oracle’s cloud business.

Always one to lean on free cash flow (FCF) as a valuation metric, Oracle has $13.8 billion in trailing 12-month (TTM) FCF. Based on a market capitalization of $247.3 billion, it has an FCF yield of 5.6%. Microsoft’s TTM FCF is $56.1 billion for an FCF yield of 2.6%.

So, the question you have to ask yourself is whether Oracle at 17.9x FCF is a better deal than MSFT at 38.5x FCF.

Larry Ellison and Safra Catz can talk a big game when it comes to the cloud, but they’ve got a long way to go to be anywhere close to the same league as Satya Nadella and Microsoft. 

If you want a value tech play, then yes, I get ORCL as a possible buy. But if you want to bet on the better cloud company, the choice is crystal clear.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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