Waiting for Oracle Cloud to Catch Up Could Be the Best Move

Current numbers are looking good, but it's too early to say Oracle has turned around

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Aug 16, 2017
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Oracle (ORCL, Financial) has truly turned things around as growing cloud revenues have already started to more than compensate for the losses experienced by legacy hardware and software revenues, allowing the company to return to revenue growth.

In fiscal 2017, Oracle posted revenues of $37.728 billion compared to $37.047 billion the year before. The 2% revenue growth was made possible by cloud revenues, which surged by 60%, offsetting a 12% decline in new software licenses and 11% decline in hardware revenues. The problem for Oracle is that software license, software updates and product support and hardware revenues still account for a major portion of Oracle’s overall revenues.

Fast-growing cloud revenues only accounted for 12% of Oracle’s overall revenues during fiscal 2017 – good enough to cover for losses in other areas but still too small to carry all the future growth on its own. Oracle’s products – outside of the cloud computing segment – are all geared toward helping companies manage their own infrastructure, the very segment that is being disrupted by the cloud computing industry.

As more and more companies take the cloud route, Oracle’s future client list is shrinking. But, fortunately for Oracle, big enterprises – the company’s typical clients – are still slow to move toward cloud, and more often than not they take the hybrid route instead of completely embracing the cloud. This will give Oracle some time to get its cloud business in shape, but the future of its legacy business is still in doubt.

Amazon (AMZN, Financial) has already crossed $16 billion in cloud revenue run rate, while Microsoft (MSFT, Financial) has soared past $18 billion. Both these companies are still growing their cloud revenues at strong double digit rates, which means cloud adoption still remains strong, and the trend will continue for some more time. Thankfully, Oracle has decided to dip its hands into two important cloud verticals, Software as a Service and Infrastructure as Service.

Oracle is still way behind the curve on the SaaS front, which is led by Microsoft and Salesforce (CRM, Financial), and things are no different in the Infrastructure as a Service segment led by Amazon. The acquisition of Netsuite, the leading Cloud ERP provider, has contributed a huge boost to Oracle’s credentials in the Software as a Service segment. Oracle says it is targeting $10 billion in annual revenue from the segment, which is very much a possibility considering the size of the CRM and ERP segments.

In fiscal 2017, Oracle’s Software as Service segment posted revenues of $3.211 billion, a growth of 60% compared to the previous year. Even if it is able to sustain the current growth rate, it will need another 2½ years to hit $10 billion in annual run rate. Meanwhile $1.3 billion in annual revenues from the Infrastructure as a Service segment is nothing much to write about, considering the size of Amazon’s pie in this segment, not to forget its above-40% growth rate.

Oracle is woefully small when pitted against the leaders of the segment. In the software industry, it is difficult to dislodge the No. 1 player. Oracle itself is a great example of that trend. Despite IBM (IBM, Financial), Microsoft and so many other companies trying so hard, to this day, Oracle’s No. 1 position in the database market remains unshakable. Windows is still the No. 1 desktop operating system in the world and it has been sitting there for ages, and Salesforce is the No. 1 CRM player despite Oracle and SAP (SAP, Financial) doing their best to get it out of the way.

Though Oracle’s cloud numbers are apparently growing, its long-term future depends on cloud revenues. But the leaders are running away from Oracle, which does put the company’s long-term future under great pressure. The next few years will make or break Oracle. If the company is not able to keep up the pace or do much better by increasing the current rate of growth, Oracle may never be able to catch up with Amazon, Microsoft and Salesforce. If you want to invest in Oracle, keep a close eye on how fast Oracle’s cloud revenues are growing next year vis a vis Amazon and Microsoft, and then make your investing decision.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.