The cloud war just got a few degrees hotter with Oracle (ORCL, Financial) publicly throwing in its hat into the Cloud Infrastructure-as-a-Service ring. The already crowded market has Amazon (AMZN, Financial), Microsoft (MSFT, Financial), IBM (IBM, Financial) and Google (GOOG, Financial) fighting for customers, with each company making it a ritual to announce big client signups and launching new products and services at an alarming rate.
Oracle Is Now Including IaaS as a Major Growth Engine for Cloud Revenues
It is not that Oracle was not present in the IaaS segment, but the company has not been focusing on this segment as growth in cloud infrastructure meant a decline in its traditional lines of business (Oracle sells software and hardware to companies so that they can manage their own IT infrastructure).
The difference in focus can be clearly seen from the first quarter numbers as Oracle reported $798 million sales from its SaaS/PaaS segment, which grew 77% compared to the previous quarter. The IaaS segment only reported $171 million after growing a mere 7% compared to the previous quarter.
Until now, Oracle was focused on beefing up its software portfolio and was targeting $10 billion in revenues from this segment alone. The recent acquisition of NetSuite (N, Financial) for more than $9 billion was a major step towards that goal. NetSuite is a leader in the cloud ERP segment, a vital growth market in the business management software segment. The acquisition of the world’s number one Cloud ERP provider did give Oracle a huge number of clients and a nice addition to its top line revenue numbers. But that was before yesterday.
Does Oracle Have the Speed and Agility to Take on AWS?
Larry Ellison took a potshot at Amazon during the Oracle OpenWorld 2016 conference yesterday claiming “Amazon’s lead is over.” A huge statement considering the current positioning of Amazon in the cloud market. It will not at all be easy for Oracle to catch up with Amazon because the retailer and tech major is a huge moving target in the cloud industry. Amazon has made it a habit of continually expanding their products and services at a furious pace. The company has also slashed prices more than 50 times since the launch of its cloud business yet has managed to grow at more than 50% for the last two years, while keeping its operating margins above 25%.
If Oracle wants a price war, then Amazon is well prepared to take it on. AWS continues to reduce prices to match those of other major cloud providers, while increasing overall revenue per user with the plethora of add-on services it offers. This brutally competitive combination has kept Amazon at the top until now, forcing the tech behemoths to keep playing catchup with an online retailer.
Oracle Reveals Its Aces, but Will It Do?
Oracle’s claim is based on two significant offerings that Ellison unveiled at the OpenWorld conference yesterday. One is based on a faster, cheaper and more capable public cloud, and the other is a hybrid solution that will allow enterprise customers to keep their infrastructure while leveraging an on-premise Oracle Cloud Engine.
The good news for Oracle investors is that the company seems to be ready to move quickly and absorb short-term pain for the sake of long-term gain. The longer it waits for its cloud business to take off, the harder its already-declining software and hardware lines will get hit. And with Amazon pushing its own database engine, Aurora, to its clients, Oracle faces a threat to its database segment dominance as well.
In order to keep pace with Amazon, let alone beat it, Oracle will need an extremely disciplined approach to constantly introducing infrastructure related services and popping pricing surprises on its clients. Oracle does have a head start over Amazon in the enterprise segment, but IBM and Microsoft have had that for years and still haven’t cracked the AWS code. What they do have now is a structured approach to cloud infrastructure that focuses parallely on public cloud and on-premise solutions. This is what Ellison is confident will give Oracle the leverage it needs to catapult past three tech majors and the world’s most popular online retailer.
As to the question of whether or not Oracle can indeed threaten Amazon’s Cloud IaaS with its latest cloud infrastructure offerings, Ellison is obviously willing to put the company’s reputation on the line to prove that it can. But only time will tell if this is merely smoke and mirrors from Oracle, or if the company actually has the means to challenge Amazon’s position.
So does this change the investment thesis for ORCL? Not yet. It’s still far too early to expect gains from these new initiatives to kick in, and what I’d really like to see is two consecutive quarters with positive revenue growth and strong numbers on both SaaS/PaaS and Cloud IaaS before I can recommend a buy for this stock.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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