Oracle Launches Critical New Cloud Product

| About: Oracle Corporation (ORCL)

Summary

Oracle recently launched a fully autonomous database integrated with an automated cybersecurity system.

What implications does the new product have for Oracle's cloud business?

How will these factors impact the investment decision?

Oracle (ORCL) recently launched a fully autonomous database called 18c. What is this product, how does it tie in with Oracle’s cloud strategy, and how does it further strengthen my argument for a buy recommendation for ORCL?

People say a lot of stuff about Oracle, but its database remains the gold standard. —Gartner (NYSE:IT) Managing Vice President Charles Eschinger, via Fortune

The database market has always been Oracle’s strength, and it still is. Research from Gartner shows that the DBMS, or database management system, market was worth around $35.9 billion in 2016, an 8.7% increase over the previous year’s $33.1 billion. The data also shows that some vendors like Oracle and IBM (IBM) have lost market share over the past five years, while others like Microsoft (MSFT) have gained.

The growth of cloud computing is slowing taking infrastructure management from the hands of companies and putting it in the hands of third party companies like Amazon (AMZN) and Microsoft, whose cloud divisions are growing at healthy double-digit rates.

Amazon has been steadily expanding its database products, while Microsoft has been offering Azure SQL databases for a while now, and both these companies have lots of customers who are just starting on cloud, and who would prefer sticking to a single cloud vendor and its database products instead of using Oracle’s, even though the latter is the clear leader in the space.

Source: AWS Cloud Databases

Oracle entered the cloud game very late, and by the time it had established its presence, Amazon and Microsoft had a built a huge lead, and they were growing fast. Over time, they will attain the size, scale and expertise to slowly dent Oracle’s dominance in the database market, and that’s what we’ve been seeing over the past five years.

Thankfully, Oracle has woken up from its cloud slumber and has been aggressive building its cloud credentials. Oracle has a differentiated product when its comes to databases, and it was only a matter of time before the company exploited that advantage on the cloud front.

During the Oracle OpenWorld Conference in San Francisco this week, Oracle CEO Larry Ellison launched 18c, a fully autonomous database with 99.995% reliability.

The term autonomous was used repeatedly because you still need human intervention to keep your databases running smoothly. Oracle 18c, on the other hand, aims to eliminate that need by automating technology work such as provisioning, upgrading, patching and so on. The best part about Oracle’s new database system is that it was developed side by side with a cybersecurity system.

ZDNet reported this:

Machine learning enabled the automation of Oracle's next gen database as well as cybersecurity system, which is in the process of becoming fully automated. "These were developed together and designed to prevent data theft. We do everything we can to avoid human intervention," said Ellison. "Cybersecurity system detects threat than [sic] passes along. Database system has to patch itself and not wait for a human to schedule downtime to gracefully implement a patch in a month or two."

Why does this matter?

Oracle’s 18c looks extremely promising, but is going to be enough to make existing Amazon and Microsoft customers shift their loyalties? Not likely. Migration is not something that companies love to do. Much like the way Oracle is still admirably holding on to its on-prem customers in the face of growing cloud, Microsoft and Amazon will continue to hold on to their customers and keep growing in the fast-growing and fast-changing cloud market. As I wrote previously:

Oracle’s software license updates and product support segment had $18.858 billion in revenues in 2015, which increased to $19.230 billion in 2017. That means Oracle has not only been able to retain its customer base, but was even able to increase its revenue from this segment during a period when the IaaS (Infrastructure as a Service) market experienced double-digit growth.

So the new product isn't going to pull customers away from the competition. Instead, what 18c will do for Oracle is give it an edge when a new customer considers third party cloud providers. That's equally, if not more, important. In addition, it will help Oracle stay in control of the database management system market despite the rapid adoption of cloud computing.

Oracle’s cloud revenue as a % of total revenue has increased from 5.49% in 2014 to 12.57% in 2017. The % contribution is only going to keep increasing, because Oracle’s cloud revenues have been growing at strong double digit rates every year, making it less of a risk-prone investment with each passing quarter.

It’s not without merit that Oracle holds nearly half of the DBMS market, and the company is now slowly bringing that firepower to the cloud segment. Oracle may have been late to the cloud race, but they’ve got the right product strategy in place to attract new customers. Moreover, it’s going to make things easier for Oracle’s existing on-prem customers to stay with the database king for their transition to cloud.

Oracle is a buy.

Disclosure: I/we 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.

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