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Jonathan Poland
Jonathan Poland
Articles (481)  | Author's Website |

Oracle Has a 30-80% Upside

The technology company is a a safe trade heading into the next correction

October 09, 2018 | About:

The 41-year-old company is still a leader in software and IT solutions from enterprise resource planning (ERP) to customer relationship management (CRM) and supply chain management (SCM).

Of course, compared to the other "hyped-up" tech companies of today, Oracle (NYSE:ORCL) looks like a dinosaur. While software licenses, support and maintenance continue to represent roughly 70% of revenue, it is pivoting toward cloud-based subscriptions. But, the database technology that made it billions in the '80s and '90s remains very much relevant today. Almost everything you do online requires a database. A large portion of them are from Oracle.

Granted, in the last decade, while Google grew revenue from $21 billion to over $123 billion, and even Microsoft doubled its top-line numbers, Oracle has puttered along. Sales are north of $40 billion, up from $23 billion in 2009. Earnings per share are actually down despite the company buying back close to a billion shares because net income fell from $5.5 billion to $3.9 billion. The company is one of the technology industry's founding parents and remains one of its cornerstones. Yet, with a series of poor (but necessary) acquisitions, the market is simply not placing a high enough value on the dominance Oracle once had.

Oracle needs rejuvenation, especially as the database will almost certainly continue to power the majority of technology development on the back end. The good news for investors is that the company owns the two largest and most popular installs, Oracle DB and MySql, which are installed with major customers like Google, Facebook, PayPal, Twitter, Walmart and Netflix.

More importantly, the switching costs are far too high for these companies to move data onto another database unless it is light years ahead. Oracle is not about to let that happen, considering it has $60 billion in cash to spend buying or reverse engineering anything that would come close.

With that said, Oracle should continue to generate 80% gross margins and $10 billion in free cash flow, which at anytime it could squeeze out an extra few billion in net profit. For now, Oracle is about one-third the size of Microsoft in terms of tevenue, Ebitda and cash flow, and it has about half as much cash as Microsoft. Microsoft's market cap is $850 billion, and the company has a forward price-earnings ratio of 25x earnings. Oracle is looking to earn close to $3.60 a share by 2020, and if its market value was put on par with Microsoft's forward price-earnings ratio, the stock could rise to $90 a share. Even at its historical earnings multiple (18x), the stock has a 30% upside attached.

In addition, during the next market correction, unless database technology becomes irrelevant, Oracle's customers will continue to pay even as they suffer declines. Oracle’s presence in the database market remains unmatched with a massive 40% share in the relational database management software vertical. The growth of Big Data has placed an even greater importance on the stability and speed of the underlying database technology, and Oracle will continue to be the leader for years to come.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
Thanks for reading. Do your own analysis before investing. Good Luck.

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