Oracle: A Tortoise That Looks Set to Outpace the Hares

Last year, cloud storage and big data came to the attention of ordinary people for the first time, rising in importance as terms used by average investors, rather than solely for tech-savvy individuals. Unsurprisingly, companies using big data, such as IBM and General Electric, have earned and saved billions from taking advantage of big data solutions. As technology heads down this new route, Oracle  (NYSE: ORCL  ) , the incumbent provider of many big-data solutions, appears to benefit the most from the rapid rise of this phenomenon. Its strong economic moat and entrenched position in the market are just a couple of the myriad of advantages that the company enjoys over its competitors.

Oracle's future is tied to the growth of cloud storage and big data. Oracle has recently engaged in a number of big acquisitions (BlueKai for about $400 million, Eloqua for $800 million, and Responsys for $1.9 billion) with the aim of expanding its cloud marketing package. This growth through acquisitions has allowed Oracle to offer a broader range of cloud-based solutions, lowering integration costs normally faced by companies that choose Oracle as their provider. Larger businesses, which are Oracle's target market, are likely to choose Oracle over competitors due to broader offerings, but also due to the company's position as a mature innovator and provider of cloud services.

Price performance
Oracle's closest competitors are VMware  (NYSE: VMW  ) , Microsoft, and Citrix  (NASDAQ: CTXS  ) Systems, so it is appropriate to compare it to these companies.

Company  Year-to-Date 1 Year 5 Years
Oracle 0.53% 8.61% 165.93%
VMWare 18.82% 41.57% 435.9%
Microsoft 2.62% 37.55% 151.24%
Citrix (4.35%) (18.3%) 178.03%

Source: Google Finance.

Oracle's price has climbed steadily over the past five years, narrowly falling behind the S&P's gain of 172.95% in the same time period. Having said this, if you adjust for dividend yields, Oracle has actually surpassed the return of the market over the five-year period. Oracle has also outpaced Microsoft, although it has fallen behind newer entrants in the cloud market, VMware, and Citrix Systems. 

The books
Oracle's financials are very strong, as would be expected from a mature, successful company. It has little debt and a large pool of liquid assets. Earnings have been growing steadily for many years, and profit margins are very healthy.

Company  Cash
(in millions of dollars)
Short-Term Investments 
(in millions of dollars)
Short-Term Debt
(in millions of dollars)

Long-Term Debt 
(in millions of dollars) 

Oracle 14,894 22,080 1,525 22,641
VMWare 2,305 3,870 0 450
Microsoft 10,059 73,885 2,300 20,676
Citrix 281 454 0 0

Source: Morningstar.com.

Oracle's debt-to-equity ratio of 0.55 is higher than the industry average of 0.3, and this difference has been exacerbated by the company's recent series of acquisitions. Nevertheless, it is important to note that the firm can comfortably pay off its debt with the liquid assets it has on hand, and the balance sheet shows it is financially stable. 

Fiscal Year 2007 2008 2009 2010 2011 2012 2013 TTM
Revenue (in millions of dollars) 17,996 22,430 23,252 26,820 35,622 37,121 37,180 37,552
     Year-Over-Year Increase (%)    24.6  3.7  12.3  32.8  4.2  0.2  
Net Income (in millions of dollars) 4,274 5,521 5,593 6,135 8,547 9,981 10,925 11,054
     Year-Over-Year Increase (%)    29.2  1.3  9.7  39.3  16.8  9.5  
Profit Margin (%)  23.7  24.6  24.1  22.9  24.0  26.9  29.4  29.4
EPS ($/share) 0.81 1.06 1.09 1.21 1.67 1.96 2.26 2.35

Source: Morningstar.com.

This chart reveals some very interesting facts about Oracle. The most striking numbers are the net income from 2008 and 2009. While other companies were struggling, Oracle managed to grow revenue and earnings in both years (significantly in 2008). Also, toward the latter years, the spread between net income and revenue growth has widened, as Oracle has managed to cut costs and integrate its offering, allowing higher net income growth, even in times of slow revenue growth.

These statistics speak volumes about Oracle's strength. Earnings have continued to grow year after year, with not a single negative growth year. Consequently, Oracle is a value play. Don't expect large, immediate growth year after year, which usually carries a lot of risk. Instead, expect consistency with strong, but controllable, low-risk growth.

Long, short, or hold?

An overall look at each company is very revealing. Oracle's return on equity has been strong at 25.5%, and it offers a sustainable dividend yield of 1.23%. Oracle also has the lowest forward P/E of 11.8, down from a P/E TTM of 16.4, indicating strong earnings growth over the next few years. If consensus earnings are to be trusted, over the next five years, earnings should grow by about 39%.

Consequently, Oracle's price is likely to fluctuate around the industry average, so expect the price to rise by approximately 39%. If earnings grow, this will increase the value of the company, putting upward pressure on the stock. Barring a macroeconomic change, which would affect the entire industry, average P/E TTM will stay at approximately 16. You can, therefore, be confident about the 39% price increase. 

Under the guidance of Larry Ellison, Oracle continues to remain a strong force in technology, as it has immersed itself in a fast-growing cloud-based revolution. Oracle has shown a marked tenacity for innovation and growth, surprising investors with its depth of long-term planning. Its books are extremely strong and it has ample cash to finance new investments and acquisitions. It will be interesting to see how Oracle tackles the recent emergence of open-source databases as a cheap option for small businesses.

Oracle appears to be well equipped to remain the largest provider of cloud-based solutions. The Motley Fool community rates Oracle as a four-star stock, and I agree. Investors who buy Oracle will want to hold it over the long run to realize meaningful gains with a sustainable, growing dividend.

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