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Summary

  • Oracle was very late to the cloud, and it has been catching up via a combination of acquisitions and organic development.
  • Oracle has compelling valuation metrics and strong earnings growth prospects.
  • Oracle is generating strong free cash flows and returns value to its shareholders by stock buyback and by dividend payments.
  • Oracle stock is ranked second among all S&P 500 tech stocks, according to "Balanced4" powerful ranking system.

Oracle Corporation (NYSE:ORCL) stock has outperformed the market this year; since the beginning of the year, ORCL stock has risen 9.6%, while the S&P 500 index has risen only 1.2% and the Nasdaq Composite Index has declined 2.6%. However, if we look from the beginning of 2013, ORCL has been an underperformer; its stock has risen only 25.8%, while the S&P 500 index has risen 31.2%, and the Nasdaq Composite Index has risen 34.8%. Nevertheless, ORCL stock is a good combination of good value and strong growth dividend stock, and in this article, I will explain why, in my opinion, Oracle stock is a promising long-term investment.

The Company

Oracle Corp. is the world's largest independent enterprise software company. The company develops, manufactures, markets, hosts, and supports database and middleware software, applications software, and hardware systems. Oracle Corporation was founded in 1977 and is headquartered in Redwood City, California.

Valuation Metrics

The table below presents the valuation metrics of ORCL, the data were taken from Yahoo Finance and finviz.com.

Oracle's valuation metrics are pretty decent; the Enterprise Value/EBITDA ratio is low at 10.53. According to Yahoo Finance, ORCL's next financial year forward P/E is low at 13.14, and the average annual earnings growth estimates for the next 5 years is high at 10.53%, these give a low PEG ratio of 1.25.

Dividend

Oracle started to pay a dividend In April 2009. The forward annual dividend yield is at 1.14%, and the payout ratio is only 22%. The annual rate of dividend growth over the past three years was negative at -3.5%.

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Source: Charles Schwab

Latest Quarter Results

On March 18, Oracle reported its third-quarter fiscal 2014 financial results, which missed EPS expectations by $0.02 (-2.9%) and missed on revenues, as the company faced stiffer competition from Salesforce.com (NYSE:CRM) and rivals selling Internet-based programs.

Oracle announced that fiscal 2014 Q3 total revenues were up 4% to $9.3 billion. New software licenses and cloud software subscriptions revenues were up 4% to $2.4 billion. Software license updates and product support revenues were up 5% to $4.6 billion. Hardware systems products revenues were up 8% to $725 million. GAAP operating income was up 7% to $3.6 billion and the GAAP operating margin was 38%. Non-GAAP operating income was up 5% to $4.4 billion, and the non-GAAP operating margin was 47%. GAAP net income was up 2% to $2.6 billion, while non-GAAP net income was unchanged at $3.1 billion. GAAP earnings per share were up 8% to $0.56, while non-GAAP earnings per share were up 5% to $0.68. GAAP operating cash flow on a trailing twelve-month basis was up 10% to $15 billion.

In the report, Oracle President Mark Hurd said:

Sales of Oracle's Cloud Applications accelerated sharply in the quarter with bookings growth of over 60%. Our quarterly Cloud Application revenue is now approaching $300 million. All of our strategic Cloud Application Suites, including Fusion Enterprise Resource Planning, Fusion Human Capital Management and Fusion Customer Experience, posted triple-digit revenue growth.

Also in the report, Oracle CEO, Larry Ellison said:

Oracle's Engineered Server Systems, including Exadata and SPARC SuperClusters, achieved over a 30% constant currency growth rate in the quarter, while throughout the industry traditional high-end server product lines are in steep decline. Our Engineered Systems business is growing rapidly for the same fundamental reason that our Cloud Applications business is growing rapidly. In both cases, customers want us to integrate the hardware and software and make it work together, so they don't have to.

Next Quarter Results

Oracle will report its fourth-quarter fiscal 2014 financial results on June 16. ORCL is expected to post a profit of $0.95 a share, a 9.2% rise from the company's actual earnings for the same quarter a year ago.

Competitors and Group Comparison

A comparison of key fundamental data between Oracle and its main competitors is shown in the table below.

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Source: Yahoo Finance, finviz.com

Oracle's valuation metrics look better than those of its main competitors. ORCL has a lower P/E ratio, a lower PEG ratio and a lower price-to-free-cash-flow ratio.

Oracle's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.

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Source: Portfolio123

Ranking

According to Portfolio123's "Balanced4" powerful ranking system, Oracle's stock is ranked second among all S&P 500 tech stocks. Only Corning (NYSE:GLW) is ranked higher (see my SA article about GLW). The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information. Fifteen years back-test has proved that this ranking system is very useful, since the average annual return has a very significant positive correlation to the "Balanced4" rank.

Technical Analysis

Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.

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Chart: finviz.com

The ORCL stock price is 3.06% above its 20-day simple moving average, 5.41% above its 50-day simple moving average and 16.71% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.18 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 68.86 approaching overbought conditions.

Analyst Opinion

Analyst opinion is divided, among the forty two analysts covering the stock, six rate it as a strong buy, fifteen rate it as a buy, eighteen rate it as a hold and three analysts rate it as an underperform.

TipRanks is a website that ranks analysts according to their performance. According to TipRanks, among the analysts covering ORCL stock there are only fourteen analysts who have the four or five star rating, ten of them recommend the stock, and four analysts have a hold rating on the stock. On May 05, Credit Suisse's analyst Philip Winslow reiterated an Outperform rating on the shares, and a $45 price target, writing that the company's potential in so-called "in-memory database" products is under appreciated. I consider Mr. Winslow's analysis valuable, since he has 4-Star rating from TipRanks for the accuracy of his previous calls.

Major Developments

While ORCL is clearly a leader in the database space and in other enterprise software categories, the shift to embracing cloud computing has only occurred recently. Oracle was very late to the cloud, and it has been catching up via a combination of acquisitions and organic development. After spending $50 billion to acquire about 100 companies in the past decade, the company is working to increase growth by remaking Oracle into a provider of the software and gear clients need to shift to Web-based computing. Sales of Oracle's Cloud Applications accelerated sharply in the last quarter with bookings growth of over 60% its quarterly Cloud Application revenue is now approaching $300 million. Oracle's Cloud Software Subscriptions revenues grew 25%, and its Engineered Systems revenue grew more than 30% in the last quarter. Oracle Cloud Applications and Engineered Systems are both rapidly growing, billion dollar run-rate businesses. Those two high-growth businesses helped Oracle deliver record year-to-date operating cash flow, and a record $15 billion of operating cash flow over the past twelve months.

Oracle released its latest database software update 12c ('c' for cloud) in July 2013. The update is still early in its implementation cycle, and the company believes that all Oracle customers will move to adopt the 12c database. Furthermore, an in-memory upgrade to Oracle database is coming next month. The consensus estimates is that the In-Memory Option for Oracle Database 12c imply about 5% license growth. However, some analysts believe that the In-Memory Option positioned to re-accelerate Oracle's database license growth to more than 10%. In my opinion, the new database software update 12c, and the coming in-memory upgrade to Oracle database will significantly increase the growth prospects of the company even more.

Conclusion

As the world's largest independent enterprise software company, Oracle will benefit from its move into the cloud. Oracle has a very strong balance sheet; it has $37 billion in cash and equivalents, and $24.2 billion in debt. Oracle is generating strong free cash flows ($14.4 billion ttm) and returns value to its shareholders by stock buyback and by dividend payments. Oracle bought back 231.6 million of its shares for $7.8 billion in the first nine months of FY14, The share count fell 5% year-over-year in fiscal 3Q14. Oracle has compelling valuation metrics and strong earnings growth prospects. Furthermore, ORCL stock is ranked second among all S&P 500 tech stocks, according to the "Balanced4" powerful ranking system. All these factors bring me to the conclusion that ORCL stock is a smart long-term investment. Furthermore, the solid dividend represents a nice income.

Source: Why Oracle Stock Is A Long-Term Buy