Bull Vs Bear Case for Oracle Corporation (ORCL)

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There is an element of doubt rising for Oracle Corporation (NYSE:ORCL). That was primarily because of two reasons. The first one was that its revenue is dipping causing concerns among the investors and the second was that while its earnings top expectations, its revenue fell shy of the predictions. The company’s focus on cloud computing is not delivering the kind of results that would offset the weakness in other divisions. There is still no evidence of the transition towards cloud adding value. On the contrary, its rivals are performing better, and there is a threat of pricing reductions further hurting the company, which would only add pressures on the top line. However, if there are some points in favor of bearish trend, there is also something in favor of the bullish trend. Let’s look at some of them and see where the company stands.

Bear Case

Concerns On Cloud Strength

One of the focus area for Oracle Corporation (NYSE:ORCL) is cloud computing. Oracle has many opportunities in the platform-as-a-service (PaaS) and software-as-a-service (SaaS) space. The company is also trying to shift its focus from its aging hardware, as well as, database products. As the company is providing the results of PaaS and SaaS together, it would be tough to measure its competitiveness with its rivals. However, it is a well-known fact that Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) were ranked as the top two firms in the cloud. It is a fact that Oracle is not delivering the same kind of revenue growth that its rivals were delivering.

Oracle Corporation (NYSE:ORCL) has yet to get into a situation where its cloud could offset the weakness in other divisions. For instance, Amazon.com, Inc. (NASDAQ:AMZN)’s Amazon Web Services’ strong performance enabled it to post an overall profit in the last few quarters. Similarly, Microsoft Corporation (NASDAQ:MSFT) was able to offset the weakness witnessed in the mobile segment by focusing on its cloud. In fact, its focus on cloud brought back investors to believe in its turnaround. As far as Oracle, it has not reached that stage because of the lower growth than its rivals. Amazon reported a 69.4% jump in AWS’ net sales whereas Oracle recorded 26% uptick in revenue in its most recent quarter.

Threat From IBM

Addtionally, Oracle Corporation (NYSE:ORCL) faces a threat from International Business Machines Corp. (NYSE:IBM) on open sourcing. That is to source its processor specifications, software, firmware and its servers with the help of OpenPower Foundation. The move could expand its Big Blue’s moat to compete with Oracle’s SPARC chips, which are meant for high-end servers. IBM’s disruptive expansion could mean that it would be able to attract smaller server markets, particularly China. As a result, Oracle’s sale of hardware might face headwinds at a rapid pace.

The third bearish point was Oracle Corporation (NYSE:ORCL) mixed results, as well as, soft guidance like IBM. Its revenue not only dipped 6.3% in the last quarter but also fell shy of expectations by $60 million. The fall in revenue was due to 7% drop in its revenue from on-premise, as well as, a 16% fall in sale of hardware products. The average revenue growth for the three-year period was only 1% whereas the industry delivered 6% growth. That meant the company is either losing revenue from some segments of databases or is compromising on pricing. Neither should sit well with investors.

Bull Case

Alliance With Intel

The threat from IBM has forced both Oracle Corporation (NYSE:ORCL) and Intel Corporation (NASDAQ:INTC) to forge an alliance to make servers that integrate the hardware of Oracle with Intel’s Xeon processors. That appears to be a perfect bet to take on IBM’s ‘big and expensive’ systems. The company CEO, Mark Hurd, indicated during the Oracle World that its product comes at a fraction of the IBM’s cost only and provides much faster performance. He said that the company would use its on-site demos to persuade its software, as well as, database customers to replace their servers with Oracle-Intel ones. Though it might be a premature thing to conclude that it would provide the valuable addition of revenue, the possibility of lifting its hardware revenue cannot be ruled out currently.

Cloud Computing

Oracle Corporation (NYSE:ORCL) is focusing on high growth cloud services compared to its on-premise database, as well as, hardware platforms. While it was true that the company’s cloud is yet to offer strength to offset any weakness in other segments, its growth assumes significance even if it meant below its rivals growth. Its contribution to the overall revenue was growing. For instance, in the second quarter, total cloud revenues represented 7% of the company’s total revenues. That was higher than the 5% recorded in the prior year quarter. It might take a few quarters more to demonstrate that cloud is providing strength to prevent weakness in other divisions.

Potential Upside

Oracle Corporation (NYSE:ORCL) shares are trading around 16.9 times of price to earnings in the trailing twelve month period. That is lower than the industry average of 20.4 times and provide upside potential. Similarly, its price to book ratio was 3.2 compared to the industry’s 3.9. The company’s average profit for the three-year period slipped only ten basis points whereas the industry suffered 6.2% drop. The company’s operating margin, as well as, net margin was strong at 34.6% and 24.6% respectively compared to the industry’s 23.1% and 15.4% respectively. Its return on assets and equity for the trailing twelve month period was 9.0% and 19.7% respectively, which was better than the industry’s 7.2% and 15.0% respectively.

Conclusion

If the valuation is taken into consideration, Oracle Corporation (NYSE:ORCL) provides upside potential. However, it would be better to wait for the current quarter results as it would provide more insight on cloud computing and possible benefits on the alliance with Intel Corporation (NASDAQ:INTC). Some clarity on the issues facing the company might take the stock to higher levels.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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