Oracle: Buy While Expectations Are Low

Summary

• Expectations for Oracle have reached a low point, as the stock suffers from several downgrades and continues to trade sideways.
• Analysts have cast doubt on the growth of Oracle's cloud business, which has run into deceleration issues in the past few quarters.
• The company recently released a new offering called Oracle Soar, which will help current on-prem customers migrate to the cloud with less manual labor involved.
• A May IDC report estimated that Oracle is still the fastest-growing cloud platform in 2016 and 2017.
• Oracle is due to report earnings on June 19, and with expectations so low, now is a good time to buy into the stock for an upside surprise.

Software giant Oracle (NYSE:ORCL) has certainly seen better days. Over the past several quarters, the company has been the subject of consistent pessimism over the growth of its cloud business - virtually the only catalyst that investors care about now. While investors aren't wrong to stake their bets on the health of Oracle's future, most are taking an extremely short-termist view that judges Oracle based from a single quarter's cloud growth number and ignores the substantial growth that Oracle has driven on the margin and free cash flow front irrespective of a slowdown in its cloud growth. At a $6 billion revenue run rate, Oracle's cloud business can't be expected to grow at >40% forever. The important metric to gauge is that Oracle is improving margins alongside its slowdown in growth - which, as judged by its expanding EPS and free cash flows, it is certainly doing.

I agree that Oracle faces some challenges in the cloud arena - its wide, unruly portfolio of applications is under competitive siege from an entire spectrum of vendors, from fellow large-cap software companies like Microsoft (MSFT) competing in the ERP and IaaS/PaaS arenas to startups like Sage competing against Oracle HCM Cloud and Oracle PeopleSoft. But to write off Oracle's ability to compete underestimates the company's huge $70 billion cash stockpile as well as decades of experience out-selling virtually every competitor in the backend software market with the most well-oiled sales machine in Silicon Valley.

Low expectations have driven down Oracle's stock price and valuation in the past few months, creating a great opportunity to buy a storied software brand for a fraction of the value of other leading software companies. The most astute comparison of Oracle's valuation is against that of its fellow large-cap software companies. Oracle, depicted in the blue line below, sits substantially beneath all

Analyst’s Disclosure: I am/we are long ORCL. 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.