Enterprise management solutions provider Oracle (NYSE:ORCL) stock has suffered from sluggish top-line growth in the past decade.
However, its foray into the cloud market is starting to show promising signs, especially in the enterprise resource planning realm. The secular trends in the cloud sector have the potential of lifting ORCL stock to new heights.
The information technology sector has been growing at an impressive pace in the past several years. Companies in the sector have seen their valuations skyrocket past their fundamentals. Oracle, however, trades at a relatively conservative valuation compared to its peers. ORCL stock trades at just 7x forward sales. It comes as a surprise considering its solid dividend profile.
Oracle paid a dividend in the past 12 years and has grown its payments annually for the past eight years. It hiked its payment by roughly 33% this year alone. Though its yield is at a modest 1.4%, with a payout ratio of roughly 28%, it has plenty of room for growth.
Having said that, let’s look at some of the growth drivers who will be powering ORCL stock for the foreseeable future.
Stealing Market Share From SAP
Oracle has been at the forefront of the digital transformations that took place during the pandemic. The primary reason for that is its superior cloud-based ERP solution which offers a whole host of features at cost-effective prices for its clients. These tools enable customers to save real money on reporting, data entry, back-end work, validation, and other aspects.
Oracle’s superior software has allowed it to chomp away at the market share of its competitors, such as SAP (NYSE:SAP). For instance, in the fourth quarter, there were two new customers to sign up with Oracle for every new upgrade from an existing customer.
SAP is yet to find an answer to Oracle’s cloud ERP. Oracle is in great shape, though, as it has won virtually every competitive ERP bid in the cloud. The situation could change quickly if the competition rises to the challenge and transitions from on-premises to cloud offerings.
Financial Performance
Oracle’s financial performance has been lackluster for the past several years now. As mentioned earlier, it has been ineffective in expanding its revenue base, which has stagnated growth. However, Oracle’s transition into the cloud sphere could turn things around for the company.
In its fourth quarter, revenues were up 8% on a year-over-year basis to $7.4 billion. Moreover, cloud license revenues also rose 9% to $2.1 billion. Additionally, non-GAAP operating income has risen by 6% to $5.4 billion, as its operating margin is 49%. Oracle Fusion and Netsuite continue to dominate the cloud ERP business, with double-digit revenue growth in the past few quarters.
Total revenue beat guidance by almost $200 million for the quarter, and non-GAAP earnings per share outperformed by 24 cents, Oracle CEP Safra Catz said.
The pandemic accelerated the transition of various enterprises to digital, and Oracle is reaping the rewards. The sector has been growing tremendously, as the cloud sector is expected to grow at a compound annual growth rate of 19% until 2028.
The Bottom Line on ORCL Stock
Oracle has struggled in the past few years to grow its revenues at a healthy pace. That all could change as it spreads its tentacles into the cloud sector. Recent results have shown that the decision has already started to pay off.
In the coming years, it will continue to cement its positioning in the industry and refine the quality of its service. ORCL stock has a substantial growth runway ahead, as its comeback appears to be in motion.
On the date of publication, Muslim Farooque 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.
