Investment Thesis
We suggest adopting a long position on this stock, positioning it as an appealing option for buying due to its consistent and expanding dividend, steady growth in revenue, and the anticipated substantial growth in the cloud infrastructure sector. There are several positive aspects within the business and financial realms that we expect to yield favorable results, aspects that the investor community currently undervalues. Oracle's Cloud Infrastructure (OCI) is predicted to outperform its competitors due to its superior performance and more affordable pricing. The company is also actively reinvesting significant capital into its operations, as evidenced by its noteworthy capital expenditures and escalating research and development costs. This could effectively support its strategic acquisition approach and product range expansion. Our projected price target, based on the DCF model's base case, stands at $131.43. Furthermore, additional potential for growth is indicated by a comparable company analysis, which demonstrates that the company is currently underestimated by investors relative to its peers, particularly when considering EV/EBITDA and P/E ratios[1].
Business Analysis
Oracle provides products and services that address enterprise information technology (IT) environments. Oracle's operations are categorized into four distinct business segments: Cloud services and license assistance, Cloud License and on-premise license, Hardware, and Services.
Oracle's range of cloud services covers a diverse spectrum of offerings, encompassing Oracle Software-as-a-Service and Oracle Cloud Infrastructure, all delivered through a cloud-centric framework. Users can conveniently access these services via their preferred web browser. These Oracle cloud services have been strategically designed to expedite their implementation, leading to quicker innovation timelines. These services feature a user-friendly interface, catering to both novice and experienced users, and are engineered for simplified maintenance, reducing the effort needed for upgrades, integration, and testing. Furthermore, these services seamlessly integrate across different deployment models, enhancing flexibility among diverse IT environments. They ensure smooth compatibility, facilitating the transition of workloads between the Oracle Cloud and other IT configurations. In addition, these services are cost-efficient, requiring lower initial investments from customers. Primarily, they prioritize stringent security measures, adhere to established standards, and provide unwavering reliability.
Oracle Applications Technologies form an integral component of the cloud services and license support business division. This sector encompasses the company's Software-as-a-Service (SaaS) offerings, widely adopted by numerous global corporations, along with license support that is typically acquired by all Oracle customers. These support solutions offered by the company play a crucial role in safeguarding and augmenting the investments made by its clientele in Oracle applications. Among these provisions are proactive and personalized support services, notably Oracle Lifetime Support, in addition to unspecified license improvements and updates during the support duration. These services are meticulously crafted to ensure that customers receive all-encompassing aid and protection for their Oracle products, ultimately enhancing the value and lifespan of their investments. Over the years 2023, 2022, and 2021, revenues from Oracle Applications Technologies and license support contributed 47%, 42%, and 41%, respectively, to the overall cloud services and license support revenues.
Oracle provides its infrastructure technologies to clients through two main avenues: the cloud and license business segment, as well as the hardware business segment. Within the cloud and license business category, these infrastructure technologies encompass the renowned Oracle Database, acknowledged globally as the premier enterprise database solution. Furthermore, it encompasses Java, which holds the distinction of being the most widely utilized software development language in the computer industry. This portfolio also encompasses an array of middleware tools and development resources. These infrastructure technologies are accessible either through subscription to Oracle Cloud Infrastructure (OCI) offerings or via the acquisition of licenses, accompanied by associated license support. This affords customers the flexibility to deploy these technologies within the Oracle Cloud, integrate them into on-premise cloud services, or implement them within their own IT environments. Notably, the company's revenue from infrastructure cloud services and license support represented 53%, 58%, and 59% of total cloud services and license support earnings for the years 2023, 2022, and 2021 respectively.
The range of Oracle's infrastructure technologies also encompasses products available via the corporation's hardware business sections. This part of the business is divided into:
- Oracle servers (e.g. servers consisting of Oracle SPARC microprocessor or x86 microprocessor)
- Oracle storage
- Oracle industry-specific hardware offerings (products designed for particular industries such as food and beverage, hotel and retail)
- Oracle operating systems (e.g. Oracle Linux, Oracle Solaris)
- Oracle hardware support (provides support for oracle systems though software updates of the hardware products, repairs, and technical support)
The fourth business segment, known as Oracle Services, delivers advisory and training services to assist customers in optimizing the use of Oracle's applications and infrastructure technologies[2].
The revenue contribution for of the four business segments can be seen in the following table:
| Business Segment | Revenue (in $ millions) | % of total revenue |
|---|---|---|
| Cloud services and license support | 35,307 | 71% |
| Cloud license and on-premise license | 5,779 | 12% |
| Hardware | 3,274 | 7% |
| Services | 5,594 | 11% |
Main Products
Oracle's widely used SaaS products include, among others:
• Oracle Fusion Cloud Enterprise Resource Planning (ERP), which is a comprehensive and unified ERP solution that aims to enhance organizational decision-making and workforce efficiency while streamlining back-office operations. It is designed to be a fully integrated and global platform, enabling businesses to benefit from a shared data and security model, along with a consistent user interface. By adopting Oracle Fusion Cloud ERP, organizations can optimize their processes and achieve improved productivity on a global scale.
• Oracle Fusion Cloud Enterprise Performance Management (EPM), which is a purpose-built solution aimed at evaluating financial performance, facilitating precise and flexible financial planning, enhancing the efficiency of financial close and consolidation procedures, simplifying account reconciliation, and meeting the reporting needs of organizations.
• Oracle Fusion Cloud Supply Chain and Manufacturing Management (SCM), which is a tailored offering intended to support organizations in establishing, enhancing, and digitalizing their supply chains while enabling swift product innovation.
• Oracle Fusion Cloud Human Capital Management (HCM), which is a specialized solution crafted to assist organizations in sourcing, nurturing, and retaining their workforce.
• Oracle Cerner healthcare, which is a purpose-built system intended to empower healthcare professionals in providing enhanced medical services to patients.
Oracle's extensively utilized infrastructure offerings encompass a variety of products, including: Familiar databases like Oracle Database and MySQL, alongside Oracle Autonomous Database, which heavily leverages machine learning to detect and rectify human errors that might otherwise remain unnoticed.
Market
Total Addressable Market (TAM)
The total addressable market (TAM) for Oracle is characterized as the worldwide information technology industry. As per research reports, the global information technology sector expanded from $8,179 billion in 2022 to $8,852 billion in 2023, registering a compound annual growth rate (CAGR) of 8.2%. By 2027, it is anticipated that the market valuation will reach approximately $11,995 billion, demonstrating a CAGR of 7.9%. The predominant catalyst fueling this anticipated expansion is poised to be cloud computing.
Serviceable Available Market (SAM)
The serviceable available market (SAM) encompassing Oracle pertains to the worldwide arena of cloud computing. As indicated by research reports, the cloud computing market is projected to escalate from $581 billion in 2023 to reach $1,243.42 billion by 2028, exhibiting a compound annual growth rate (CAGR) of 16.4%. This acceleration can be attributed to technological disruptions, particularly in areas like Artificial Intelligence and Machine Learning. Moreover, another contributing factor to this growth trajectory is the impact of the pandemic. Even post-pandemic, a portion of individuals continues to work remotely, thereby underscoring the indispensability of cloud computing for daily operations.
Serviceable Obtainable Market (SOM)
Oracle Corporation currently holds a share of approximately 2% in the cloud computing market. The company's market presence in the Software-as-a-Service (SaaS) sector stands at around 4%, while its influence in the Infrastructure as a Service (IaaS) segment is limited (Statista, 2022). There exists substantial potential for Oracle to elevate its standing in the Infrastructure as a Service domain over the forthcoming years, mainly fueled by strategic partnerships with Intel and Red Hat, coupled with endorsements from notable entities like Uber, FedEx, Toyota, and Zoom, among others. With Oracle's OCI demonstrating cost-effectiveness (in comparison to its counterparts) and high value, it's anticipated to be widely adopted by various companies aiming to develop AI models such as ChatGPT. As a result, the company is poised to erode the market share of its rivals while concurrently increasing its own. Given its substantial market share in the SaaS segment, an expansion in the IaaS market share is projected to potentially double Oracle's overall cloud computing market share within the upcoming 5 years, potentially reaching around 5%.
Competition
The global landscape of cloud computing is characterized by its fragmentation, leading to a landscape of intense rivalry. Established entities like Amazon, Microsoft, SAP, IBM, and Salesforce engage in fierce competition, alongside emerging startups that strive to innovate and secure their share of the market. Consequently, Oracle finds itself in the midst of rigorous competition from both established industry players and freshly established firms. Given Oracle's assertive approach to acquisitions and its pursuit of expansion into novel domains like healthcare software (as evident in its acquisition of Cerner, a healthcare software provider), the range of its competitors is poised to expand further. This includes a broader spectrum of rivals such as Epic Systems Corporation, Allscripts Healthcare Solutions, Inc., Arcadia Solutions, athenahealth, Inc., and InterSystems Corporation, among others. Below is a detailed analysis of the most important competitors of Oracle Corporation[1]:
| Company | Description | Competition | Market Capitalization |
|---|---|---|---|
| Amazon | Amazon's subsidiary, AWS, stands as the foremost global provider of cloud services, presenting an extensive range of cloud computing solutions. | In the market for cloud infrastructure and platform services, Oracle Cloud directly rivals AWS. These two corporations compete to attract enterprises seeking to harness the benefits of cloud technology for scalability, adaptability, and cost-efficiency. | $1,450,366 mil. |
| Microsoft | A worldwide technology giant, Microsoft offers a diverse range of products and services. While Oracle and Microsoft vie in certain domains, their main areas of emphasis diverge. Microsoft holds a significant role in operating systems, cloud solutions, productivity applications (Office Suite), gaming (Xbox), and collaboration tools (Microsoft Teams). | In the domain of cloud computing, Microsoft Azure directly contends with Oracle Cloud. Both enterprises provide solutions in Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). Moreover, Microsoft's Power Platform competes with Oracle's platforms for application development and low-code solutions. | $2,407,540 mil. |
| IBM | IBM is a technology and advisory firm with a well-established history in multiple industries, encompassing fields like cloud offerings, artificial intelligence, and enterprise solutions. | Although both corporations have a track record of providing business software solutions, their rivalry extends to domains such as cloud services and the management of database systems. IBM's cloud service, IBM Cloud, goes head-to-head with Oracle Cloud, and IBM's database system, Db2, competes directly with Oracle Database. | $129,280 mil. |
| Salesforce | Salesforce holds a prominent position in the customer relationship management (CRM) industry. It delivers cloud-centric solutions for overseeing sales, marketing, and customer service operations. | Oracle directly challenges Salesforce with its Oracle CRM Cloud product. These two enterprises are in competition to secure their portion of the swiftly expanding Customer Relationship Management (CRM) arena, presenting a variety of functionalities and possibilities for customization to cater to the demands of their customers. | $206,546 mil. |
| SAP | SAP is a leading enterprise software company known for its Enterprise Resource Planning (ERP) systems and other business applications. Its expertise lies in aiding companies in the management of diverse operations, encompassing finance, supply chain, and human resources. | Oracle and SAP are significant contenders in the realm of Enterprise Resource Planning (ERP). They vie for the attention of corporate clients in search of comprehensive and unified answers to oversee their business activities. Frequently, their ERP products, namely Oracle ERP Cloud and SAP S/4HANA, directly compete against each other within the market. | $162,318 mil. |
| Workday | Workday is a company that offers enterprise software through cloud-based services, focusing on delivering solutions for managing human capital (HCM) and financial management tailored to businesses and organizations. | Workday directly competes with Oracle HCM Cloud in the HCM space. Oracle's HCM Cloud similarly presents a comprehensive array of cloud-driven human resources and talent management software, targeting the requirements of sizeable corporations and institutions. | $59,401 mil. |
Financials
Historic and projected financial statements
| Income Statement | 2021A | 2022A | 2023A | 2024P | 2025P | 2026P | 2027P | 2028P |
|---|---|---|---|---|---|---|---|---|
| Total revenues | 40,479 | 42,440 | 49,954 | 53,950 | 58,266 | 62,928 | 67,962 | 73,399 |
| Cost of revenues | (7,855) | (8,877) | (13,564) | (14,649) | (15,821) | (17,087) | (18,454) | (19,930) |
| Sales and marketing | (7,682) | (8,047) | (8,833) | (10,003) | (10,803) | (11,667) | (12,600) | (13,608) |
| R&D | (6,527) | (7,219) | (8,623) | (9,063) | (9,788) | (10,571) | (11,417) | (12,330) |
| G&A | (1,254) | (1,317) | (1,579) | (1,684) | (1,818) | (1,964) | (2,121) | (2,291) |
| Amortization of intangible assets | (1,379) | (1,150) | (3,582) | (2,994) | (2,283) | (1,620) | (664) | (635) |
| Acquisition related and other | (138) | (4,713) | (190) | (190) | (190) | (190) | (190) | (190) |
| Restructuring | (431) | (191) | (490) | (490) | (490) | (490) | (490) | (490) |
| Total operating expenses | (25,266) | (31,514) | (36,861) | (39,072) | (41,193) | (43,589) | (45,936) | (49,474) |
| Operating income (EBIT) | 15,213 | 10,926 | 13,093 | 14,878 | 17,073 | 19,339 | 22,026 | 23,925 |
| Interest expense | (2496) | (2755) | (3505) | (3,716) | (3,585) | (3,555) | (3,503) | (3,327) |
| Interest income | 101 | 94 | 285 | 196 | 60 | 20 | 21 | 22 |
| Non-operating (expenses) income, net | 181 | (616) | (747) | (747) | (747) | (747) | (747) | (747) |
| Income before taxes | 12,999 | 7,649 | 9,126 | 10,612 | 12,801 | 15,057 | 17,797 | 19,873 |
| Provision for benefit from income taxes | 747 | (932) | (623) | (1,009) | (1,217) | (1,431) | (1,692) | (1,889) |
| Net income | 13,746 | 6,717 | 8,503 | 9,603 | 11,585 | 13,625 | 16,106 | 17,984 |
| Balance Sheet | 2022A | 2023A | 2024P | 2025P | 2026P | 2027P | 2028P |
|---|---|---|---|---|---|---|---|
| Current assets: | |||||||
| Cash, cash equivalents, marketable securities | 21,902 | 10,187 | 3,860 | 748 | 888 | 1,039 | 1,202 |
| Trade receivables, net of allowances for credit losses of $428 and $362 as of May 31, 2023 and May 31, 2022, respectively | 5,953 | 6,915 | 7,468 | 8,066 | 8,711 | 9,408 | 10,160 |
| Prepaid expenses and other current assets | 3,778 | 3,902 | 4,214 | 4,551 | 4,915 | 5,309 | 5,733 |
| Total current assets | 31,633 | 21,004 | 15,542 | 13,365 | 14,514 | 15,755 | 17,096 |
| Non-current assets: | |||||||
| Property, plant and equipment, net | 9,716 | 17,069 | 22,131 | 26,726 | 30,854 | 33,751 | 33,923 |
| Intangible assets, net | 1,440 | 9,837 | 10,624 | 11,474 | 12,392 | 13,383 | 14,454 |
| Goodwill, net | 43,811 | 62,261 | 67,242 | 72,621 | 78,431 | 84,705 | 91,482 |
| Deferred tax assets | 12,782 | 12,226 | 12,226 | 12,226 | 12,226 | 12,226 | 12,226 |
| Other non-current assets | 9,915 | 11,987 | 12,946 | 13,982 | 15,100 | 16,308 | 17,613 |
| Total non-current assets | 77,664 | 113,380 | 125,168 | 137,029 | 149,003 | 160,374 | 169,697 |
| Total assets | 109,297 | 134,384 | 140,710 | 150,394 | 163,517 | 176,129 | 186,793 |
| Current liabilities: | |||||||
| Commercial paper/revolver | 0 | 563 | 0 | 7,325 | 12,307 | 14,622 | 18,406 |
| Accounts payable | 1,317 | 1,204 | 1,300 | 1,404 | 1,517 | 1,638 | 1,769 |
| Accrued compensation and related benefits | 1,944 | 2,053 | 2,217 | 2,395 | 2,586 | 2,793 | 3,017 |
| Deferred revenues | 8,357 | 8,970 | 9,688 | 10,463 | 11,300 | 12,204 | 13,180 |
| Other current liabilities | 4,144 | 6,802 | 7,346 | 7,934 | 8,569 | 9,254 | 9,994 |
| Total current liabilities | 15,762 | 19,592 | 20,551 | 29,520 | 36,279 | 40,510 | 46,366 |
| Non-current liabilities: | |||||||
| Long-term debt, plus current portion | 75,859 | 89,918 | 85,855 | 75,855 | 70,161 | 64,911 | 54,741 |
| Income taxes payable | 12,210 | 11,077 | 11,963 | 12,920 | 13,954 | 15,070 | 16,276 |
| Deferred tax liabilities | 6,031 | 5,772 | 5,772 | 5,772 | 5,772 | 5,772 | 5,772 |
| Other non-current liabilities | 5,203 | 6,469 | 6,987 | 7,545 | 8,149 | 8,801 | 9,505 |
| Total non-current liabilities | 99,303 | 113,236 | 110,577 | 102,093 | 98,036 | 94,554 | 86,294 |
| Oracle Corporation stockholders' equity (deficit): | |||||||
| Preferred stock, $0.01 par value—authorized: 1.0 shares; outstanding: none | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 2,713 shares and 2,665 shares as of May 31, 2023 and 2022, respectively | 26,808 | 30,215 | 34,046 | 38,183 | 42,651 | 47,477 | 52,689 |
| Accumulated deficit | (31,336) | (27,620) | (23,424) | (18,363) | (12,410) | (5,373) | 2,484 |
| Accumulated other comprehensive loss | (1,692) | (1,522) | (1,522) | (1,522) | (1,522) | (1,522) | (1,522) |
| Total Oracle Corporation stockholders' equity (deficit) | (6,220) | 1,073 | 9,099 | 18,298 | 28,719 | 40,582 | 53,651 |
| Noncontrolling interests | 452 | 483 | 483 | 483 | 483 | 483 | 483 |
| Total stockholders' equity (deficit) | (5,768) | 1,556 | 9,582 | 18,781 | 29,202 | 41,065 | 54,134 |
| Total liabilities and stockholders' equity (deficit) | 109,297 | 134,384 | 140,710 | 150,394 | 163,517 | 176,129 | 186,793 |
| Cash Flow Statement | 2024P | 2025P | 2026P | 2027P | 2028P |
| Net income | 9,603 | 11,585 | 13,625 | 16,106 | 17,984 |
| Depreciation and amortization | 6,250 | 5,760 | 5,395 | 4,767 | 4,974 |
| Stock based compensation | 3,831 | 4,137 | 4,468 | 4,826 | 5,212 |
| Decreases / (Increases) in working capital assets | (865) | (935) | (1,009) | (1,090) | (1,177) |
| Increases / (Decreases) in working capital liabilities | 1,522 | 1,644 | 1,776 | 1,918 | 2,071 |
| Other non current assets | (9,721) | (9,548) | (9,466) | (9,138) | (9,787) |
| Other non current liabilities | 1,404 | 1,516 | 1,637 | 1,768 | 1,910 |
| Cash from operating activities | 12,023 | 14,160 | 16,426 | 19,156 | 21,187 |
| Capital expenditures | (8,317) | (8,073) | (7,903) | (7,000) | (4,511) |
| Cash from investing activities | (8,317) | (8,073) | (7,903) | (7,000) | (4,511) |
| Long term debt | (4,063) | (10,000) | (5,694) | (5,250) | (10,170) |
| Revolver | (563) | 7,325 | 4,983 | 2,314 | 3,784 |
| Share repurchases | (1,265) | (1,526) | (1,795) | (2,121) | (2,369) |
| Common dividends | (4,143) | (4,997) | (5,878) | (6,948) | (7,758) |
| Cash from financing activities | (10,034) | (9,198) | (8,384) | (12,005) | (16,513) |
| Net change in cash during period | (6,327) | (3,112) | 140 | 151 | 163 |
Ratios
| 2021A | 2022A | 2023A | |
| Profitability ratios | |||
| Gross profit | 81% | 79% | 73% |
| Operating profit margin | 38% | 26% | 26% |
| Net profit margin | 34% | 16% | 17% |
| Liquidity ratios | |||
| Current ratio | 2.01 | 1.07 | |
| Quick ratio | 1.77 | 0.87 | |
| Leverage ratios | |||
| Debt to Assets | 69% | 67% | |
| Debt to Equity | -1315% | 5815% | |
| Debt to Capital | 108% | 98% | |
| Interest coverage ratio | 726% | 510% | |
| Efficiency ratios | |||
| Asset turnover ratio | 39% | 37% | |
| Performance ratios | |||
| Return on equity (ROE) | -116% | 546% | |
| Return on assets (ROA) | 6% | 6% | |
| Return on invested capital (ROIC) | 20% | 15% | |
| Return on capital employed (ROCE) | 10% | 11% |