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Riddhi Kharkia
Riddhi Kharkia
Articles (151) 

Oracle: An Inexpensive Stock With a Bright Future!

July 30, 2014 | About:

One of the things that seldom goes unnoticed on the Wall Street is the generosity of the packages handed down to the top executives of a company. Well, the latest to fall a victim to shareholders’ criticism was Oracle (NYSE:ORCL) and the company has reacted with a favourable move. As per news, Oracle has slashed the grant of stock options to CEO Larry Ellison and top executives following shareholder discontent. Though the move has come in after years of discontent expressed by the shareholders, it will go a good way in substantiating the position of Oracle in respect of shareholder friendliness.

The areas that matter

Oracle has been performing quite well over the last few quarters especially in the software as a service segment. In the last quarter itself, it achieved a revenue growth of approximately 25% in spite of fierce competition from peers like Salesforce.com and SAP AG (NYSE:SAP). Oracle is a strong contender in the Software-as-a-Service (SaaS) and Platform-as-a-service (Paas) segment and is eyeing a growth of around 25% to 30% in the fiscal 2014. In an attempt to increase its reach, Oracle recently unveiled a new SaaS offering for social and marketing purposes. The service, termed as Oracle data cloud merges some of the company's existing data services with its recently acquired BlueKai Audience Data Marketplace to tap into more external data sources around operations and customer experience. Social media is growing phenomenally and marketers are interested in personalizing their marketing campaigns as a result of which, Oracle’s big data service could prove to be a good revenue spinner.

One of the things that came out clear in the fourth quarter earnings was company’s aggressive investment in building the SaaS and PaaS cloud business which grew around 20%, approaching a run rate of $2 billion with nearly $455 million in revenue for the last quarter. Oracle has a complete and modern portfolio of SaaS products in the cloud. For example, CRM sales and CRM service in marketing and in human capital management they have core human resources, recruiting, talent management and payroll. In nutshell, Oracle is making the right moves in leveraging its strength in SaaS and PaaS business.

One of Oracle’s biggest rivals in the SaaS segment is SAP AG whose revenue from CRM grew a considerable 13% as compared to Oracle’s 4%. In order to expand its foothold in the CRM space, SAP acquired Hybris last year, a widely recognized leader in e-commerce technology. This acquisition has positioned SAP to deliver a seamless customer experience, a necessary requirement in the e-commerce industry. Besides the advancement in providing various services, the second quarter results of the company also highlighted a strengthening cloud-based business. It reported a 39% jump in revenue from cloud subscriptions and support in the quarter. In fact, in terms of numbers, SAP is not quite behind Oracle as it reported an annual cloud revenue run rate approaching $1.6 billion. It implies that Oracle will have to stay cautious of SAP’s exponential growth in this area by constantly investing and innovating on the product line-up.

Acquiring growth

Talking of the product line-up, it is significant to note that Oracle is on its way to acquire MICROS Systems, a producer of hardware and software for the hospitality and retail industries for a whopping $5.3 billion. Even though the deal is yet to be cleared by the EU authorities but once this acquisition goes through then Oracle will definitely benefit from the addition of new products and services tailored for the above-mentioned industries. Additionally, most of the solutions provided by MICROS are cloud oriented and therefore aligns seamlessly with Oracle’s objective of promoting cloud-based solutions.

The trump card: Valuation

Though Oracle has often been criticized for being unable to grow at a faster pace and losing market share to competitors, I believe that the company is on the right track to investing quite aggressive efforts in expanding its operations. And while the recent moves are impressive, Oracle’s current valuation is the real clincher. The company trades at a forward multiple of around 11.77, which is less than half of the industry average of around 25. Similarly, Oracle enjoys a healthy PEG ratio of around 1.80 whereas the industry average stands at around 2.38. On top of a cheap valuation, Oracle’s dividend yield falls around 1.20%, almost equal to that of SAP’s yield of 1.30%. Therefore, I would not be wrong in saying that Oracle represents a healthy and valuable option in this space owing to a relatively cheap valuation and a queue of massive opportunities in cloud business.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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