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Like Other Old-Tech Names, Oracle's Value Is Tied To Its Ability To Reignite Growth

Jul. 10, 2018 7:49 AM ETOracle Corporation (ORCL)AMZN, CRM, IBM, MSFT8 Comments
Stephen Simpson profile picture
Stephen Simpson


  • Oracle's ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.
  • Oracle Fusion has been a strong performer, but legacy businesses haven't been nearly as strong and enterprise CIOs seem to no longer view Oracle as a critical supplier/partner.
  • Oracle shares do look a little undervalued on a DCF basis, but the valuation seems more fair on a relative basis given the low revenue growth outlook.

Reading the sell-side research on Oracle (NYSE:ORCL), I’m struck by how frequently the analysts benchmark Oracle’s valuation multiples (whether it’s P/E, EV/FCF, EV/revenue, et al.) against the peer/industry group in an attempt to make the “Oracle is undervalued” case, but neglect to benchmark the company’s revenue growth rate. While margins and free cash flow certainly do matter, revenue growth is a significant near-term driver for valuation multiples, and Oracle’s growth rate is much more in the CA Inc. (CA)/IBM (IBM) neighborhood than the Microsoft (MSFT)/Adobe (ADBE) neighborhood of older tech stocks.

Given the weak growth rate, the recent trends in Oracle’s position in sell-side CIO surveys, and the company’s ongoing challenges with the on-premises-to-cloud transition, I can’t work up much enthusiasm for the stock. While many old-tech companies have faced challenges in their attempts to renew themselves and remain competitive (Microsoft had its issues, IBM is still in the middle of them…), I just don’t see enough of a discount here to take on the incremental execution risk.

Oracle Seems To Be Sliding Down The Charts

Say what you will about sell-side research, but it can provide some useful data points and benchmarks from time to time. I particularly find it interesting to read the various CIO spending surveys that many analysts conduct on an annual basis. I’m concerned about two different issues that I’ve seen emerge in these surveys over the last couple of years – less spending in areas where Oracle is strong and less overall esteem/prestige for Oracle.

As far as spending priorities go, it’s not any great surprise that security and cloud dominate CIO priorities across almost all sell-side CIO surveys. While increased public cloud spending is a good thing for Microsoft (and Amazon (AMZN)), Oracle’s presence in IaaS is too small today to

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s 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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Comments (8)

11 Jul. 2018
I was personally involved in ERP decision and implementation the last 2 years. First their sales tactics haven't changed. This includes ORCL execs going over the decision committee calling COO to say we were making huge mistake. It was received as desperation move and will long be remembered by all (HR, Fin and IT senior management).
Secondly their productS (emphasis intentional) are inferior. Author mentions multiple versions of Fusion. To those in the biz, this will sound familiar for ORCL upselling specific purpose application modules at high costs. Fusion isn't true cloud/saas and doesn't even have all the functionality of their existing and outdated on premise apps (Peoplesoft version 9.1.1984) . NetSuite isn't as dated but is Finance only with no HCM but i'm sure they can haphazardly bolt on to other ORCL apps (again, sound familiar?).
Thus even if you are willing to ignore their hsitorical business tactics but desire one stop, full ERP suite (Finance and HR) in cloud-saas app, you're not going to find it at ORCL.
The Stock Stooge profile picture
What solution did you end up going with? Was WDAY's financial suite competitive?
12 Jul. 2018
EDIT: ERP is obviously just one piece of ORCL but thought readers might appreciate first hand experience.

We are very happy with WDAY. Have you ever heard of ERP implementation going well? Ours went well!
WDAY is clearly the leader in HR space, I'm on finance side of large, international finance co (20+ currencies, complicated consolidation, etc). We made them sign NDA on using our co name. WDAY FIN has come a long way the last couple years. WDAY was honest and very cognizant of not overselling functionality. We began monitoring vendors 5+ years ago including ability to deliver on future dev roadmap which was key factor in our decision model.
12 Jul. 2018
Prematurely hit submit: WDAY's financial suite certainly met our international FIN needs. I can't emphasize enough the flexibility of WDAY's architecture and "ability to configure but not customize".
Stephen, Thank you for this well written article. I think you have nailed the challenge.
IMHO ORCL need to decide what do they want from IaaS? Is it (A) a serious general competitor to AMZN, MSFT and Google or (B) Is is a functionally capable complement to their SaaS customers who want to complete their solution with some IaaS?
In terms of revenue growth I am not so sure because of the challenge you stated, but I am sure that we will see growth in profit as the management team have stated on the earnings call that they are achieving high margins on their SaaS solutions. I do tend to agree that "Revenue is Vanity and Profit is Sanity" :-)
Lastly I think that we will see a big shakeout of lots of cloud and subscription based companies once ASC606 is fully implemented and it will be much easier to compare results.
Best wishes in your investing.
The Reasonable Investor profile picture
Good article. I believe ORCL has a relatively more defensible legacy business in software/relational databases compared to hardware companies like HPQ. Software tends to be sticker as evidenced in their high renewal rates and maintenance contracts.

Chief Investment Thoughts: http://www.invtots.com
Thoughtful and reasonable analysis, thank you. Bottom line is ORCL has become a portfolio company, driven by acquisition and worn-out tactics, not innovation. Both co-CEOs are previous generation thinkers, Hurd arguably from the previous-previous generation. MSFT shed its legacy skin by replacing its previous generation style CEO with Nadella - and the results speak for themselves. And look at the rest of ORCL bench - all been there a long time. ORCL needs new risk-taking, innovation-oriented management. Every day that goes by where Catz/Hurd run the company ORCL becomes less relevant. You don't grow by doing the same old thing and always being a second or third mover. Finally, the "Oracle shops" are growing long in the tooth. As CIOs and senior IT personnel are increasingly coming from Gen X, Y and Z, the "Oracle only" walls slowly crumble. Time for some revolution in Redwood Shores or else SELL, SELL, SELL!
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