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Summary

  • Oracle achieved an impressive growth in cloud computing in its latest quarter.
  • Oracle is determined to become number one in both the SaaS and the PaaS businesses.
  • Oracle has good valuation metrics and strong earnings growth prospects. The company is generating strong free cash flows and returns value to its shareholders by stock buyback and dividend payments.

Although Oracle's (NYSE:ORCL) fourth quarter results were disappointing, the company achieved impressive growth in cloud computing. In my opinion, Oracle's determination to become number one in both the SaaS and the PaaS businesses is encouraging, since cloud services will continue to be growth drivers for revenues. ORCL's stock has been doing pretty well this year. Since the start of the year, ORCL's stock has gained 8.8%. However, in 2013, ORCL's stock significantly underperformed the market. Since the beginning of 2013, ORCL's stock has gained only 24.9%, while the S&P 500 index has increased 39.4%, and the Nasdaq Composite Index has risen 50.3%. However, considering its good valuation metrics and strong earnings growth prospects, ORCL's stock has plenty of room to move up. In addition, the company is generating strong free cash flows and returns value to its shareholders by stock buyback and dividend payments.

The Company

According to Oracle, it 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, and the data were taken from Yahoo Finance and finviz.com.

Oracle's valuation metrics are good. The forward P/E is low at 12.10, the Enterprise Value/EBITDA ratio is also low at 10.22, and the average annual earnings estimates for the next five years is high at 9.42%.

Dividend and Share Repurchase

Oracle started to pay a dividend. In April 2009. The forward annual dividend yield is at 1.15%, and the payout ratio is only 19.8%. The annual rate of dividend growth over the past three years was very high at 31.7%, and over the past five years was also very high at 57.2%.

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Source: Charles Schwab

Since the company generates lots of cash, and the payout ratio is very low, there is a good chance that the company will continue to raise its dividend payment.

Oracle exited the latest quarter with cash and marketable securities of $38.82 billion compared with $37.22 billion at the end of the previous quarter. Free cash flow was $14.34 billion.

Oracle repurchased 49 million of its shares for $2.0 billion in the quarter. The company bought back 281 million of its stock for $9.8 billion in FY14. The share count fell 4% year-over-year in FY14.

Latest Quarter Results

On June 19, Oracle reported its fourth quarter fiscal 2014 financial results, which missed EPS expectations by $0.04 (4.20%) and missed on revenues.

Oracle announced that fiscal 2014 Q4 total revenues were up 3% to $11.3 billion. Software and Cloud revenues were up 4% to $8.9 billion. GAAP Cloud software-as-a-service (SAAS) and platform-as-a-service (PAAS) revenues were up 25% to $322 million, while non-GAAP SaaS and PaaS revenues were up 23% to $327 million. In addition, Cloud infrastructure-as-a-service (IaaS) revenues were up 13% to $128 million. New software licenses revenues were unchanged at $3.8 billion. Software license updates and product support revenues were up 7% to $4.7 billion. Overall hardware systems revenues were up 2% to $1.5 billion with hardware systems products up 2% to $870 million, and hardware systems support up 2% to $596 million.

In Q4, both GAAP and non-GAAP earnings per share were lowered by $0.02 due to a non-operating loss caused by exchange rate changes in Venezuela. Furthermore, last year's Q4 GAAP earnings per share increased $0.04 because of a $269 million acquisition price reduction. As a result of these two factors, Q4 GAAP earnings per share were unchanged at $0.80 compared with last year while GAAP net income was down 4% to $3.6 billion and GAAP operating income was down 2% to $4.9 billion.

In the report, Oracle President and CFO Safra Catz said:

Our cloud subscription business is now approaching a run rate of $2 billion a year. As our business has transitioned, more software revenues are being recognized over the life of a subscription rather than upfront. We're making this transition to cloud subscriptions and ratable revenue recognition while continuously increasing our top-line revenue and our bottom-line profits year-after-year.

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

Oracle is now the second largest SaaS company in the world. In SaaS, we're in front of everybody but salesforce.com. In IaaS we're larger and more profitable than Rackspace. We have by far the most complete portfolio of modern SaaS and PaaS products in the industry: CRM: Sales, Service & Marketing; HCM: HR, Payroll and Talent; ERP: Accounting, Procurement, Supply Chain and more. All these SaaS products run on the world's most powerful PaaS: the Oracle in-memory multitenant database and Java. We plan to increase our focus on the Cloud and become number one in both the SaaS and the PaaS businesses.

Next Quarter Results

Oracle will report its first quarter fiscal 2015 financial results on September 15. ORCL is expected to post a profit of $0.64 a share, a 8.5% 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 has the highest gross and operating margins among the stocks in the group. However, its PEG ratio is higher than that of IBM.

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: to Portfolio123

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The ORCL stock price is 3.08% above its 20-day simple moving average, 2.45% above its 50-day simple moving average and 7.47% above its 200-day simple moving average. That indicates a short-term, 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 negative at -0.24 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 60.18 which do not indicate overbought or oversold conditions.

Analyst Opinion

Analysts' opinion is divided. Among the thirty-eight analysts covering the stock, six rate it as a Strong Buy, fifteen rate it as a Buy, fourteen 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 sixteen analysts who have the four or five star rating, eleven of them recommend the stock, and five analysts have a Hold rating on the stock.

Major Developments

Although Oracle's fourth quarter results were disappointing, the company achieved an impressive growth in Cloud. GAAP Cloud software-as-a-service and platform-as-a-service revenues were up 25% to $322 million, while non-GAAP SaaS and PaaS revenues were up 23% to $327 million. In addition, Cloud infrastructure-as-a-service (IaaS) revenues were up 13% to $128 million. According to the company, it became the second largest Cloud SaaS company in the world.

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.

Oracle is continuing its efforts to increase its focus on the Cloud and become number one in both the SaaS and the PaaS businesses. Hence, the company announced on July 31 that it has signed an agreement to acquire TOA Technologies (TOA). TOA is a leading provider of cloud-based field service solutions that manage and optimize the last mile of customer service for enterprises by coordinating activities between dispatchers, mobile employees and their customers. TOA's solutions manage over 120 million service events annually in more than 20 countries and include global brands across many industries including DISH Network, E.ON, Home Depot, Ricoh, Telefonica, Virgin Media and Vodafone.

In my opinion, Oracle's determination to become number one in both the SaaS and the PaaS businesses is very logical, since Cloud services will continue to be growth drivers for revenues. Oracle is generating substantial free cash flows ($14.34 billion ttm), and it has a very strong balance sheet, $38.8 billion in cash and equivalents, and $22.7 billion in debt. Therefore, strategic acquisition in a fast growing market is a smart decision.

ORCL's stock has been doing pretty well this year. Since the start of the year ORCL's stock has gained 8.8%, while the S&P 500 index has risen 7.6%, and the Nasdaq Composite Index has increased 8.7%. However, in 2013, ORCL's stock significantly underperformed the market. Since the beginning of 2013, ORCL's stock has gained only 24.9%, while the S&P 500 index has increased 39.4%, and the Nasdaq Composite Index has risen 50.3%. Nevertheless, considering its good valuation metrics and strong earnings growth prospects, ORCL's stock, in my opinion, has plenty of room to move up.

Conclusion

In my opinion, Oracle will benefit from its aggressive move into the Cloud. Already in the last quarter, Oracle became the second largest Cloud SaaS company in the world. Oracle has good valuation metrics and strong earnings growth prospects. The company is generating strong free cash flows and returns value to its shareholders by stock buybacks and dividend payments. Oracle bought back 281 million of its stock for $9.8 billion in FY14. The share count fell 4% year-over-year in FY14. All these factors bring me to the conclusion that ORCL's stock is a smart long-term investment.

Source: Why Oracle Is A Good Investment Opportunity