Oracle Corp. (ORCL, Financial) released its second-quarter financial results on Monday, revealing an earnings miss of 4 cents per share. However, despite narrowly missing its target, the company's key segments retained phenomenal growth.
Even though the software company may not be a frontline pick for short-term investors, it is reasonable to claim the asset might be a good long-term play for many.
Earnings Review
As mentioned, Oracle released its second-quarter earnings report on Sept. 12. The immediate standout in the report was the company's 17% year-over-year earnings growth, propelled by robust enterprise spending.
Here's a breakdown of the company's quarterly segmental top-line performance.
- Cloud revenue: $3.6 billion, growing by 50% year over year measured in functional currency.
- Cloud infrastructure: $900 million, growing by 58% year over year measured in functional currency.
- Cloud application: $2.7 billion, growing by 48% year over year in functional currency.
Additionally, the company's enterprise resource planning cloud offerings also surged as its NetSuite segment grew 30% year over year.
It is evident that Oracle's cloud and cloud infrastructure segments are the big cash cows, both in terms of dollars and growth. The company only controls an approximate 3% of the cloud market; however, with robust segment revenue growth and more than $9.54 billion in broad-based cash from operations, it has more than enough leverage to spend on developing more substantial cloud offerings.
Key valuation metrics and dividends
Although Oracle has sublime growth aspects attached to its stock, I have a few reservations regarding its valuation. The price-earnings ratio of approximately 32 suggests the market might be frontrunning the stock's potential.
I opted to look at the company's earnings yield, which is the reciprocal of the price-earnings ratio. This is often done to evaluate growth stocks as it provides a clearer picture of earnings attribution. Oracle's 4% earnings yield is a tad low. Ideally, a stock needs to have an earnings yield of above 7% to be classified as undervalued.
However, with the company's exponential cloud-based growth, I would be more than willing to give it the benefit of the doubt on the asset pricing front.
Lastly, Oracle's dividend profile is superior to its peers. The company's stock buyback policy is more aggressive than its competitors, while its dividend yield also exceeds other industry players. Therefore, the stock can be categorized as a "best-in-class" asset.
Final word
Oracle's secular growth trajectory is stimulated by cloud-based activities. The company boasts firm enough segment growth and a strong enough cash flow statement to spend heavily on segment development, which could attach additional value to it.
Furthermore, despite numerous valuation concerns, Oracle's shareholder compensation profile is superior to its peers.
All matters considered, Oracle could be considered a sound long-term investment.
