Oracle: A leader in ERP and DBMS but still faced with growth limitations

Author: Lorenzo Di Sarro, Andrew Qiao and Jerry Yuan

Summary:

- Oracle’s stock price has soared over 40% in the last year and has seen consistent revenue growth within new and existing segments

- Oracle has made several aggressive acquisitions and has quickly established itself in the cloud computing space

- Oracle founder, Larry Ellison has personally led the autonomous database segment and has seen a 56% surge in revenue over the past quarter

- Free Cash Flows over the past 5 years have averaged $12.8 billion and Oracle declared a dividend of $0.32 per share, up $0.08 from last year

Overview and Performance

Oracle is a multinational computer technology company based in Austin, TX that provides an array of different products and services related to cloud computing, enterprise resource planning, hardware, and enterprise-grade database software. Most of Oracle’s services are in the enterprise resource planning (ERP) space and have seen a merge with cloud technology over the past two decades allowing for customers to manage day-to-day business activities while still harnessing the benefits of being integrated into the cloud. Apart from providing the best cloud ERP services in the market, Oracle has also gained attention through their increase in AI-based solutions that have been integrated throughout several products and services.

Over the last year, Oracle shares jumped by 40% (outperformed the market by roughly 22%) reflecting the company’s recent success in entering the cloud space. In addition, Oracle declared a dividend of $0.32 per share on 3/10/2021, which raised dividends by 33%.

Cloud Computing Segment and Future outlook

In 2021, cloud services and license support accounted for $28.7 billion of Oracle’s total revenue (70.9% of total revenue) making it the largest segment with continued customer growth and expansion. In addition, Oracle’s platform-as-a-service (PaaS) and software-as-a-service (SaaS) products are both expected to show strong growth over the next several years with the increase of enterprises making a shift to the cloud. Oracle has seen big enterprises such as Zoom Video Communications and MercadoLibre make the jump to their cloud infrastructure services, which has ultimately helped Oracle gain traction in the competitive cloud space.

In Oracle’s most recent earnings call, application revenues grew by 11% year over year and infrastructure-related revenues saw a 6% jump in the same timeline, which together contributed over $7.38 billion to total revenue. Because of this growth, Safra Catz, Oracle’s CEO had announced that they expect to double cloud CAPEX spending in FY ’22 to nearly $4 billion. Following the announcement, Catz stated that they see cloud as being fundamentally “a more profitable business” when compared to Oracle’s on-premises services.

Although there has been significant growth in Oracle’s cloud computing segment, it is worthy to note that Oracle is a new entrant to the space and has grown its position in the cloud space through several acquisitions. The aggressive approach into the space was an attempt to build a strong cloud position to compete with services such as Microsoft Azure, Salesforce, and Amazon’s AWS platform. Because of the rush to build up a position, Oracle faces a dicey future with the possibility of these new acquisitions not keeping up with the company’s expectations and failing to gain market share alongside services that have been well established in the cloud space.

Market Share Shifts and ERP expansion

Traditionally ERP software requires companies to purchase and maintain hardware to store data and protect company information. This process often comes at a high cost and requires a team of IT staffers to maintain a company’s servers. But with the advent of Oracle’s NetSuite product back in 1998, the need for hardware was no longer necessary as companies could now access critical business data through any device with an internet connection. This breakthrough in the ERP space showed the capabilities of the cloud and opened the door to endless cloud-based solutions all through the software services industry. The process of merging ERP services with cloud computing software has proven to become a beneficial outcome for Oracle as they have been able to gain significant market share due to SAP failing to rewrite their ERP system for the cloud. This overall shift has bolstered the success and profitability of Oracle’s ERPs systems with Oracle Fusion and NetSuite now being the two most popular cloud ERP systems on the market. In addition, Oracle has recently been handed the title for best supply chain and big business ERP service according to Business-Software.com.

Autonomous Database

Oracle has also been a dominant player in the database management category. Like their enterprise resource planning services, Oracle has become a key innovator in the space and have earned the title through merging foreign technologies (AIOps and Machine learning) with database systems to continuously improve their line of database products and gain a competitive edge against services like AWS. As a result, autonomous database products saw rapid adoption in the market and shined a light on the next driver for growth through the success of new products. Services such as Oracle Cloud Infrastructure and Gen2 Cloud plus have led most of the segment’s growth with both products seeing consumption revenue increase by over 100% in the last year. Led by Oracle’s founder Larry Ellison, the autonomous database segment has continued to attract the attention of new customers now with machine learning capabilities being able to dramatically lower the cost of database operations for its users.

Thesis

Overall, we believe that Oracle (Tenjin Score: 2.01/5) currently stands at a HOLD rating at a price target of $80. Despite consistent growth across new segments and several promising investments in the cloud computing space, Oracle is still considered a new player in cloud software and has also entered the market through several aggressive acquisitions that may potentially hurt company financials if they fail to perform to the company expectations. On top of that Oracle is also up against the fierce competition in a soon-to-be overcrowded space (PaaS and SaaS in particular) that could potentially shrink Oracle’s overall market share and put an end to the growth that they have experienced since inserting themselves into the cloud space. Despite these concerns, Oracle is still seen as the dominant player in both database management and enterprise software services. This position has naturally led Oracle to be a pioneer in ERP and DBMS technology with their most recent innovation being cloud and AI-based solutions to improve overall services and lower customer costs. Although the company shows strong fundamentals and promising valuations there are several qualitative reasons that we believe could deter some of Oracle’s future growth. We believe that some of Oracle’s legal tangles may also pose a threat to the company’s financials. Back in April of this year the U.S. The Supreme Court ruled against Oracle after they had filed a copyright complaint in which they demanded “$9 billion in damages for Google’s unauthorized use of Java application-program interfaces.” Recently a lawsuit was filed that pertained to a cloud contract with the Department of Defense’s (DoD) Joint Enterprise Defense Infrastructure (JEDI) which could negatively affect future business opportunities between Oracle and the DOD.

Strong fundamentals and valuation

Overall Oracle is in a healthy financial position and has recently experienced high levels of growth with the continued push towards building up a position in the cloud computing space. This expansion has further diversified revenue streams and has also placed Oracle in new segments with high growth potential if their investments and acquisitions perform as expected. Oracle has also maintained a steady stream of free cash flow over the past few years averaging around $12.8 billion years over a year and has seen a 6.5% jump leading into 2021 with the help of new cloud-based, AI, and big data-related products. The introduction of these products has also displayed Oracle’s ability to create a high return on capital and has maintained a higher rate against most competitors for the past 5 years.

Oracle has maintained a fairly low price-to-earnings ratio when compared to the broader market and the average within the software services industry. In addition, earnings have shown stable growth over the past few years with forecasted earnings continuing to reflect more growth over the next two years.

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Takeaway

Oracle (Tenjin Score: 2.01/5) has experienced a strong wave of growth across almost all segments and within its overall performance on the stock market over the last year. Software systems such as ERP and DBMS have been consistently driving growth and have seen innovative solutions attract a new batch of customers to their services. Oracle has also inserted itself into the competitive cloud computing space in a rather aggressive approach in order to catch up with big players in the space. This new segment has been met with significant growth over the last few quarters and has even led management to double Capex spending to $4 billion. Although the move into the cloud computing space has been successful there are still concerns with Oracle’s ability to maintain and grow its market share in a space that has started to become overcrowded. For this reason, we believe Oracle is at a HOLD rating and see that the overall performance of their cloud computing segment could ultimately change the investment narrative for Oracle over the long run.