Oracle: High Quality Businesses Are Not Necessarily Expensive

Oct. 29, 2020 8:54 AM ETOracle Corporation (ORCL)29 Comments


  • In the cloud services space, profitability does not seem to matter anymore, while higher expected growth means everything.
  • Oracle has taken a very different and more long-term oriented approach, which could easily make the company a superior investment.
  • Oracle is still dominating in the enterprise applications segment and is moving fast to the cloud while not compromising profitability and increasing investments.
  • Valuation remains very conservative, and the risk of downward multiple repricing is extremely low.

Oracle to edge out Microsoft in purchasing TikTok - news

Source: gsmarena

So far, Oracle (NYSE:ORCL) seems to have been playing catch up with the high flying and exciting names in the cloud space. Oracle is considered a niche player in the Cloud Infrastructure (IaaS) space and Customer Relationship Management (CRM) and Human Capital Management (HCM) applications as well. However, ORCL is dominating the enterprise applications and database segments while also developing its cloud infrastructure, which will offer an important competitive advantage.

Due to its legacy business, the company's topline revenue does not appear to be growing at all. This is rather striking for most investors in an industry where, as we will see later, topline growth at whatever the price means everything.

Source: prepared by the author using data from Oracle annual and quarterly reports

This has led to a decade of disappointing performance relative to the overall market, the technology sector, and to the current leaders in the cloud infrastructure, platform, and software space.

ChartData by YCharts

After all, who wants to hold an old legacy business that has been late to the exciting cloud space, that has had flat revenues over the past decade and disappointing share price returns. Whether you are a small retail investor or a professional, it is very hard to justify buying a company with such a track record at times when share prices of high-growth companies are skyrocketing.

Although this statement is enough for most people to simply disregard Oracle, for me, it is a sign to look further as attractive long-term opportunities are usually born out of extreme pessimism. Especially in a fast-evolving industry and a field where almost everyone feels so competent and confident in forecasting the future based on past performance. At the same time, people such as Warren Buffett proclaim:

I don't think I understand where the cloud

This article was written by

Vladimir Dimitrov, CFA profile picture
Investment strategy for those seeking steady and above-market returns

Vladimir Dimitrov is a former strategy consultant with a professional focus on business and intangible assets valuation. His professional background lies in solving complex business problems through the lens of overall business strategy and various valuation and financial modelling techniques.

Vladimir has also been exploring the concept of value investing and in particular finding companies with sustainable competitive advantages that also trade below their intrinsic value. He supplements his bottom-up approach with a more holistic view of the markets through factor investing techniques.

Vladimir made his first investment in farmland right out of high school in 2007 and consequently started investing through mutual funds at the bottom of the market in 2009. In the years that followed he has been focused on developing his own investment philosophy and has been managing a concentrated equity portfolio since 2016. Vladimir is LSE Alumni and a CFA charterholder . 

All of Vladimir's content published on Seeking Alpha is for informational purposes only and should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ORCL over 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.

Additional disclosure: Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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