Co-founder and Chief Technology Officer Larry Ellison describes Oracle (NYSE:ORCL) as a cloud leader to be reckoned with, and he may be right -- eventually. But today it's Microsoft (NASDAQ:MSFT) at the top of the cloud heap. But Oracle's late start -- thanks to Ellison's early dismissal of cloud computing as nothing more than "the latest fashion" -- could work in investors' favor because it translates to tremendous upside from here.

Meanwhile, Microsoft's decision to name Satya Nadella as CEO three years ago has proven to be an absolute game changer. Microsoft's stock was meandering under former chief Steve Ballmer, but no longer. Nadella has changed Microsoft's business focus as well as its culture -- and it's working.

So which stock is the better buy? Let's take a look.

People standing behind Oracle sign.

Image source: Oracle.

The case for Oracle

Oracle's fiscal second quarter (ended Nov. 30) was one to remember as it relates to cloud results. For the first time, Oracle's combined cloud Platform-as-a-Service (PaaS), Software-as-a-Service (SaaS), and infrastructure revenues topped the $1 billion mark. PaaS and SaaS revenue climbed 81% last quarter  to $878 million.

Cloud Infrastructure-as-a-Service (IaaS) couldn't match the growth rate of Oracle's skyrocketing SaaS and PaaS results, but its revenue still climbed 6% to $175 million, bringing total cloud sales to $1.05 billion, equal to 12% of Oracle's $9 billion in total revenue last quarter. For some perspective, a year ago Oracle reported $649 million in cloud revenue, which equaled just 7% of its $8.99 billion in total sales.

Oracle has quickly become a software vendor of note outside the cloud, too. Its legacy hardware and related support sales of $1 billion notched a 10% decline from a year ago, which can be attributed to Oracle's shift to up-and-coming opportunities along with the inevitable slowing of "old-school" enterprise hardware markets.

Though software and license sales declined 4% last quarter, when combined with cloud revenue -- an Oracle earnings report staple nowadays -- the $7.2 billion was a 2% year-over-year improvement. Better still, and something worth watching for when Oracle reports estimated third-quarter earnings on March 13, is that combined cloud and software revenue now accounts for 80% of all sales, up from 78% a year ago.

Microsoft employee testing cloud solutions.

Image source: Microsoft.

The case for Microsoft

Similar to Oracle, Microsoft's cloud results are centered on SaaS. According to Gartner, overall SaaS cloud revenue jumped $36 billion to $144 billion in 2016. SaaS is forecast to grow at an annual rate of 37% through 2020, and Microsoft is leading the charge. The only cloud segment expected to grow faster than SaaS are business process sales, at 43% per year, which is another key to Microsoft's stellar results.

Last quarter, Microsoft's cloud annual revenue run rate was more than $14 billion, led by commercial Office 365 sales, its Azure platform, and Dynamics CRM. Azure, which is Microsoft's PaaS for delivering cloud solutions, soared 93%. Despite its rapid cloud growth, Microsoft is controlling costs.

Total revenue increased just 1.2% last quarter to $24 billion, but net income grew nearly 4% to $5.2 billion. With about 200 million fewer shares outstanding and the company managing expenses, Microsoft's $0.66-per-share earnings was a 6.5% increase, and that included a negative $0.01 hit from the LinkedIn acquisition.

So, which is the better buy?

In addition to being further along in its cloud transition than Oracle, Microsoft has multiple revenue drivers including the LinkedIn assets and the data that comes with it. And Microsoft is leading the race to dominate augmented reality (AR), a market expected to generate $83 billion by 2021 compared to virtual reality's (VR) $25 billion.

Oracle is on the right path, and its 1.5% dividend yield is respectable. However, considering Microsoft's cloud and AR leadership positions, a dividend yield of 2.5%, data analytics driven by artificial intelligence (AI), Bing search, and OS leadership positions, it all adds up to Microsoft as the better buy.

 
 

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gartner. The Motley Fool owns shares of Oracle. The Motley Fool has a disclosure policy.