Last month when Oracle (ORCL, Financial) reported its numbers, earnings per share came in at 59 cents, beating estimates. Revenue, however, declined 3.4% year over year to $9.01 billion. With the state of big tech, Oracle is definitely the best value right now.
The state of big tech
- Alphabet (GOOG, Financial) trades at 30x earnings.
- Microsoft (MSFT, Financial) trades at 40x earnings.
- Facebook (FB, Financial) trades at 85x earnings.
- SalesForce (CRM, Financial) is losing money.
- LinkedIn (LNKD, Financial) is losing money.
- Twitter (TWTR, Financial) is losing money.
Oracle, on the other hand, has a very modest price-to-earnings ratio of 20 and has done a fantastic job financially. Net income is up to $9 billion in the last 12 months versus $3.3 billion in 2006. Gross margins remain near 80%, and earnings per share and book value are up because the company keeps buying back its own stock.
2006
- Revenue: $14.3 billion.
- Net income: $3.3 billion.
- Dividends: $0.
- Shares: 5.2 billion.
- Book value: 2.87.
TTM
- Revenue: $37 billion.
- Net income: $8.8 billion.
- Dividends: 60 cents.
- Shares: 4.3 billion.
- Book value: 11.05.
And, if you’re a basketball fan, the company lends its name to the NBA’s top team, the Golden State Warriors, for whatever that’s worth.
From a business perspective, Oracle’s recent quarterly performance indicates that the company could have excellent potential in the cloud services industry. The company continues to make progress in cloud, with revenues and bookings from software-as-a-service (SaaS) and platform-as-a-service (PaaS) offerings advancing at a high rate – management announced 942 SaaS and 1,143 PaaS customer wins.
While Oracle definitely lacks the media hype and high growth rates of pure-play cloud services such as Salesforce.com and Workday (WDAY, Financial), it's profitable, and that’s what shareholders should be looking for long term.
Oracle has a solid moat around it because of the high switching costs the company’s customers have to endure. This helps support industry-leading profit margins and excessive capital returns. Sure, the future is “Cloud Computing,” but as investors have seen, Oracle’s decade of heavy investments in this space has proved to be a smart move.
The company is a database-driven enterprise. Databases are capable of storing large amounts of data, which turn into valuable assets for most companies. Historically, transplanting data is expensive (i.e., time consuming), and most companies view replacing them as risky –Â hence Oracle’s moat. Going into the cloud means trusting another company with your data, and customers want to work with a trusted leader with a legacy for excellent support. Again, that’s Oracle.
Given a modest growth estimate and its current rate of share buybacks, over a five- to 10-year period, I’ll give the stock a $110 price target. That’s not quite 15% a year, but at $40 a share, you’re paying a fair price for a good company. And, if the multiples expand alongside earnings per share growth, you could see that price reached sooner rather than later. It would not be unreasonable to see a 30x multiple to go along with a $5 EPS.
As for the gurus, there’s plenty of big money in Oracle. From Jeremy Grantham (Trades, Portfolio)’s 17 million shares to Donald Yacktman (Trades, Portfolio) with 22 million shares down to Ray Dalio (Trades, Portfolio)’s seemingly small 555,928-share position, there are more than 30 big money managers in the stock.
Can they all be wrong? Hovering around $40 a share, at 20x earnings, this is a fair price for a great company.
Disclosure: I do not have a position in the company's stock.
