Oracle (NASDAQ: ORCL) is a strong performer when it comes to software sales and related after-sale services. Consulting, database management and Internet applications are key pillars of Oracle's revenue stream. Recently, the company has invested resources in capturing revenue streams based on hardware manufacture and design. Some view this as a risky move. The question of Oracle's performance as an investment is largely the question of its expanding hardware-based development, sales and profit margins. Based on a frank assessment of risk, recent news and EPS data, Oracle seems attractive as an investment only in the long term.
Annual Report: Risk Overview
Oracle's latest annual report shows several interesting pieces of information. Oracle management readily admits that the company is vulnerable to uncontrollable factors such as competitors, unexpected innovations, international demand and evolving government actions. Other risk factors are, at least in principle, within the company's control. Oracle is new to the hardware business. The annual report admits [pdf] that "Our limited experience with managing our hardware business and forecasting its future financial results creates additional challenges with our forecasting processes."
Oracle is trying to transition to providing Cloud services but that is hard to do in a slow economy without cutting into profit margins. Oracle's lack of experience with hardware-based revenue and profit generation is likely to entail significant risk to prospective equity investors. While the company is learning, competitors will not be sitting still. Given other companies' greater experience in hardware management and sales, Oracle's prospects are likely to remain dim as far as hardware is concerned.
Aside from Cloud services, Oracle is betting on luring in businesses with high-end analytics and "big data" services. The general goal is to facilitate smarter decision-making for businesses operating in a complex and competitive environment. Oracle's development of in-memory database technology works to overcome disk limitations when it comes to data storage and processing. Often, a client will want to recognize patterns or hints in data without explicitly looking for a specified solution. This flexibility is not easy to implement with existing hardware. In-memory technology facilitates this flexibility, making it more appealing to potential customers.
Zooming into quarterly data for the most recent fiscal year, Oracle's income statement and balance sheet appear steady. Quarterly cash flow, on the other hand, hints at more volatile company prospects. Operating cash flow sunk from $5.67B to $795M during the second quarter. This steep drop bounced back to a quarterly operating cash flow of only $4.56B by the end of the fiscal year. This is not enough to inspire confidence in growth. Oracle was cash-flow negative for the fiscal year, losing $342M due to large investing and financing cash flow losses. Oracle stock price dips corresponding to quarterly financial reports reaffirm recent skepticism about Oracle's prospects.
Quarterly EPS is projected to grow in this fiscal year. FY 2015 is predicted to have largely the same earnings growth pattern. Q1 2014 gave $0.59/share, with subsequent quarterly earnings projected to increase to $0.99/share in Q4 2014. Going back to FY 2011, Oracle maintained the same pattern of quarterly growth, with the first quarter of each fiscal year generating about 58-62% of the EPS Oracle generated in the last quarter of each fiscal year. Oracle's quarterly EPS history merits a positive outlook but with a caveat: ORCL appreciated a bit over 50% since June 1, 2010. The NASDAQ climbed over 70% to date. This is the time during which FY 2011, 2012, 2013 and Q1 2014 earnings posted their rhythmic gains. In the last few years, investors would have been better served with a less risky Nasdaq index as opposed to Oracle.
Oracle's inexperience with hardware, stock dips that correspond to quarterly reports and overall uncertainty of its ambitious investments in Cloud and In-Memory can understandably make prospective investors nervous. Short-term traders should be wary, especially with the general stock market reacting to news of continued QE by the Fed.
Nevertheless, zoom out for a more interesting picture. In the last 10, and even more so, in the last 15 years, Oracle stock performed much better than the Nasdaq. Long-term investors who can handle volatility would be well-advised to buy Oracle. Revenue from software and services provide a sufficient cushion to develop hardware expertise without compromising overall profit margins.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.