Oracle (ORCL) was founded in 1977 and today is one of the largest enterprise grade database, middleware and application software providers in technology. Although the company has been slow to adopt cloud computing, it has expanded its operations in recent years. Today the company offers cloud solutions and services that customers can use to both build and manage a variety of cloud development models.
To catch up and build its position in the cloud computing space, the company has been very active on the acquisition front. Additionally, Oracle has been investing heavily in these acquisitions to better compete with major competitors such as AWS, Microsoft Azure, Salesforce and IBM. Since the market is already overcrowded, there is the risk that these acquisitions might eventually hurt Oracle’s profitability.
In 2010 Oracle acquired Sun Microsystems and began selling hardware products and services consisting primarily of servers and storage products. However, many experts believe that lower hardware volumes can ultimately hurt Oracle’s topline growth as it is also a low-margin business.
According to Zacks Investment Research, Oracle offers cloud solutions and services that are built upon open industry standards such as SQL, Java and HTML5. Moreover, Oracle Cloud provides access to application services, platform services and infrastructure services for subscription. Oracle also has an Enterprise Manager offering that allows them to manage cloud environments for clients. An analyst from Zacks believes that Oracle is benefiting from strong adoption of cloud-based solutions, comprising NetSuite ERP, Fusion ERP and Fusion HCM.
For example, as reported by Zacks, 8×8 and Zoom Video Communications selected Oracle Cloud Infrastructure services to address business needs, which Zacks believes is a testament to the strength of its cloud offerings. Perhaps more importantly, Zacks also suggested, and I quote “strong demand for the latest autonomous database supported by ML is anticipated to drive top line and provide the company a competitive edge against Amazon Web Services (“AWS”) in the Database-as-a-Service market.”
Finally, Morningstar gives Oracle a wide economic moat rating due to the high customer switching costs. They further point out that Oracle’s relational database and ERP software provide the backbone for many companies’ mission-critical data. Therefore, Morningstar suggests that migrating such data away from Oracle is not only costly and time-consuming, but would have to be done very carefully because corruption of this data has the potential to decimate a business. Additionally, there is the risk that valuable customer data could be lost for good.
Oracle Fundamental Value Based On My Favorite Valuation Metrics
Since I am known by many as Mr. Valuation, I feel it is important to point out that I always look at valuation from numerous metrics and perspectives. I am often asked what my favorite valuation methodology is, and my answer is always the same – all of them. Therefore, what follows is a summary of Oracle’s valuation through the lens of the various metrics available on FAST Graphs – the fundamentals analyzer software tool.
As the reader reviews each of these price/valuation references based on numerous metrics, I ask that you recognize the real-world validity of each. In other words, regardless of how these relationships were generated, recognize how the company’s stock price has historically correlated to each. By doing so, the reader will receive clear and undeniable evidence that the ultimate producers of shareholder returns are functionally related and generated through business results. This includes both capital appreciation and total dividend income and growth. Succinctly stated, business performance is significantly more important than price action in the long run.