The question surrounding Oracle (NYSE:ORCL) stock is more about if it can separate itself from the pack than if it is a good investment.
Investors who were fortunate enough to have purchased Oracle in the beginning of the year have profited nicely. ORCL shares have appreciated in price by approximately 37.5% during the period.
But the cloud race is evolving and Oracle has neither set itself apart nor proven to be an absolute winner.
Oracle released its fourth quarter fiscal earnings back in mid-June. They paint a fairly clear picture of the company. Oracle is a growing company. And it is also a company which is scaling up its business sectors in a very linear fashion.
Oracle’s revenues grew by 7.54% in the three months that ended May 31 between 2020 and 2021. Growth is good, and for an organization of its size, 7.54% revenue growth is very respectable.
Yet, when this news was released ORCL stock declined in value from $81 to $77. Part of the answer to the reason why this occurred lies in its business mix. The company’s two main revenue drivers, cloud services and license support and cloud license and on premise license, remained stagnant.
Like its competition, Oracle is fast moving to a more cloud based business more heavily dependent on cloud revenues. The problem wasn’t that Oracle didn’t grow its cloud revenue. Cloud services and license support revenue accounted for 66% of Oracle’s $11.227 billion in quarterly revenues. And cloud license and on premise license accounted for 19% of that total revenue pie.
The problem is that those are the exact same contributions as a year earlier as percentages, 66% and 19%. The cloud-computing landscape is rife with strong competitors and implies that Wall Street is looking for companies to increase their cloud revenue percentages, not stagnate.
Although Oracle declined slightly on that news the company has a huge opportunity in front of it.
Cloud Battle Intensifying
A recent article in the Wall Street Journal highlighted the idea that the battle for cloud dominance is fundamentally changing. The thrust of the article was that cloud competition, initially dominated by Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), is becoming much more fragmented.
Companies are not only realizing that other IT cloud providers exist, but they are also increasingly contracting with multiple cloud providers to meet their specific needs. Credit reporting firm Experian (OTCMKTS:EXPGY) perfectly exemplified the changing dynamic.
As the above mentioned article explains:
“Experian began its move to the cloud with Amazon Web Services in 2014. It has since added services from Microsoft, Google and more recently Oracle, whose technology it had historically used in its own data centers.”
One the one hand, Experian’s choice of Oracle bodes well and implies that the company has a strong cloud suite. Yet, it also indicates that Oracle will be facing downward price pressure on its cloud suite.
That means that Oracle’s product managers are going to be fighting pitched battles to prove its cloud is better than that of multiple other large competitors. So, Oracle will have to identify the strengths and applicability of the smaller parts of its cloud suite. Then it will have to market those strengths to its customers who will be receiving increased attention from Oracle’s competitors.
None of this bodes well for the bargaining power of cloud companies in selling their enterprise solutions. Back in the day, Amazon and Microsoft possessed bargaining power as the main competitors. But the cloud is evolving and that first mover advantage has eroded for them. That is good for Oracle, but it clearly won’t be easy to gain market share.
Oracle is still a strong company but it’s difficult to see why it should stand out among a sea of strong competitors. It has to up its cloud revenue as a percentage and also convince enterprise customers that it is better than others. It won’t be easy which is why it’s difficult to see ORCL stock shooting upward soon.
On the date of publication, Alex Sirois 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.