Revenue growth of 4% rarely grabs headlines, especially among technology companies. But after years of being branded “boring,” Oracle Corp. is pleading a compelling case for reconsideration.
quarterly results, released Monday, were mainly on par, with but a slight miss on the top line and a subtle beat on the bottom. Overall, they were, well, pretty boring but, in this case, that’s the point.
That, however, is not the topic of the day. What’s most relevant is quite simple: Why Oracle is becoming an enticing company, and why investors need to take a closer look.
Over the past year I believe that Oracle has proven both to the market and to itself that steady growth, stable recurring revenue and incremental innovation can equate to robust returns for investors.
So far, so good
This year has been a good one, so far, for Oracle, with the company’s stock up 35%. Still, the past 12 months’ price-to-earnings ratio (P/E) remains below 20, trading at about 50% of where Microsoft
is today and one-fifth of Salesforce
— two of the company’s primary competitors. And while Oracle’s modest overall growth doesn’t warrant such multiples, these numbers do indicate that despite the substantial rise, it is yet to reflect its potential.
Cloud is the future
For Oracle and investors, the bellwether for the company’s trajectory is cloud. For the past several years, this has been the focal point of its products, services, acquisitions, innovation and investor communications. Investor enthusiasm and skepticism should be closely correlated to its success in its cloud endeavors, namely its IaaS (Oracle Cloud Infrastructure) and its SaaS (cloud-based applications) businesses. Not that other parts of the company are unimportant, but rather they reflect the past. For Oracle, the cloud is the future.
The challenge has been determining just how robust and ready Oracle’s cloud business really is. Two years ago, I raised red flags about Oracle’s Gen 1 Cloud, and I used the word “pretender” to describe the company’s entry into the cloud. I felt as though a massive lack of revenue transparency and an inferior offering to Amazon’s
AWS and Microsoft’s Azure didn’t give investors a lot to be excited about. Oracle rose to the challenge and countered with some solid offerings.
Two things have changed for Oracle that instantly made the company and its cloud business more attractive. Those are the launch of its Generation 2 Cloud and a growing commitment to revenue transparency in the business.
After years of investors calling for greater revenue transparency, last quarter’s earnings finally included a legible glimpse. The company reported that more than 25% of its quarterly revenue, or $2.5 billion, is now made up of Oracle Cloud (SaaS and IaaS). While I would be even more encouraged if I could clearly split the IaaS and SaaS business, the reality is no one, not AWS, not Azure, nor IBM
does this, so why should Oracle?
What we do have now is a $10 billion run rate for cloud and a clear indicator that Oracle is accelerating its execution on its cloud strategy, finding itself more closely in the rearview of its competitors.
In its earnings release, co-founder Larry Ellison pointed to an upcoming Gartner report that is set to show Oracle Cloud Infrastructure now surpassing Google as the No. 3 in one of its major cloud ranking reports. This, at the very least, shows how far Oracle has come, as Google Cloud has found itself nearly undisputed as the third cloud behind AWS and Azure.
The SaaS portion of Oracle’s business has also displayed continuously encouraging revenue growth on par with Salesforce for its CRM and ERP applications NetSuite and Fusion, with growth rates for these applications consistently north of 20% during the past four quarters, with this quarter results putting Fusion ERP up 32% and NetSuite ERP up 28%.
Is Oracle back?
For the past several years, Oracle and its leadership have been doing a lot of shouting about its cloud prowess, but the market clearly wasn’t buying it.
However, time, money and a steadfast commitment to making a hard pivot to where hundreds of thousands of existing customers are taking their technology investments can bode well for a company like Oracle.
CEO Safra Catz, Ellison and the company’s leadership knew that the move to cloud was paramount, but the transition for a company like Oracle wasn’t easy. This was reflected in its early efforts to build a successful cloud business.
Today, however, the outlook is different. The company’s ambitions to build a vertically integrated cloud offering for its current and future customers provide a growing total addressable market and an increased stickiness that can only help solidify its long-term prospects. This is particularly true for a company that’s revenue is already over 70% recurring.
In some ways, it wasn’t ever a question of whether Oracle’s cloud business could succeed; it was just when the solution would catch up to its customer’s needs. It appears that now may be that moment.
In a market as laden with uncertainty as this one, perhaps boring is a welcome addition to portfolios looking for stable growth, yield and a company positioned in the right market spaces.
And despite the name Oracle rarely drawing excitement, the company seems to be returning to its best form — perhaps deserving another look from investors.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Microsoft, Zoom, Salesforce, AWS and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.