Both Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL) have been under scrutiny from investors as they navigate through significant business transitions. For Cisco, the ongoing transformation means less reliance on its legacy routers and switches business, and a greater focus on cloud-based security solutions, enterprise communications, and the Internet of Things (IoT).
Though it took Oracle co-founder and current CTO Larry Ellison a while to get aboard the cloud bandwagon, his company has finally done so, and that's beginning to pay significant dividends. Last quarter marked the first time Oracle's cloud sales topped the magic $1 billion plateau. However, Oracle's cloud results come with a caveat.
So of these two veteran tech majors looking to capitalize on the next waves of change, which is the better buy?
The case for Oracle
Based on its year-over-year results, Oracle's second quarter was close to a home run. Each of its key cloud units -- software-as-a-service (SaaS), platform-as-a-service (PaaS), and infrastructure-as-a-service (IaaS) -- performed admirably.
The hands-down leaders in terms of revenue growth were Oracle's SaaS and PaaS units, which together climbed a whopping 81% to $878 million. Yes, that's a mere fraction of Oracle's total sales -- which were flat year-over-year at $9 billion -- but it's a fraction that's growing larger with each passing quarter.
The aforementioned $1 billion-plus in cloud sales includes the $175 million in IaaS revenue Oracle generated last quarter, good for a meager 6% improvement -- which represents a tremendous opportunity. Combined with infrastructure software, IaaS and related software generated an estimated $471 billion last year with the majority -- $294 billion -- from IaaS alone.
Which begs the question: Why is Oracle seemingly putting such a significant opportunity on the back burner? The upside potential in its cloud software business is also significant, but at these relatively early stages, Oracle shouldn't leave anything cloud-related unexploited.
All the positive cloud news has been good for Oracle stock, pushing its share price up 10% in 2017, but there's a caveat. Oracle's late arrival to the cloud translates to awfully tame comparables, so investors would be wise to take that into account before over-celebrating.
The case for Cisco
Though the cloud and related solutions are also on Cisco's radar, it's the focus on IoT and the fast-growing data security markets that will drive this company's long-term growth. The good news is that Cisco is making inroads in both key areas, which it demonstrated yet again the past couple of days.
Connected cars are one avenue of IoT growth, and Cisco is among a host of providers going all in to win market share as suppliers to the auto industry. Its recent deal with Honda to power its new connected car platform is the latest in a string of wins for Cisco in a market expected to grow to more than $46 billion in three years. So Cisco is moving the needle with its efforts in two of the fastest growing areas of IoT -- the other being smart cities. Better still, its work to dominate data security could give it a position that surpasses even its IoT ambitions.
As with Oracle's cloud results, Cisco's strong data security growth should be viewed in context. Through the first two quarters of Cisco's fiscal 2017, security sales have climbed 13% to $1.07 billion. That's a small fraction of Cisco's $23.9 billion in total revenue, but therein lies the opportunity. One report suggests data security spending will reach $1 trillion between now and 2021, and Cisco is leading the charge.
Cisco expects there will be 26.3 billion connected devices globally in 2020, which is why its new "security architecture for mobile service providers" solution is such a timely addition to its offerings. Targeting telecoms with data security solutions in an increasingly mobile, digitized world is a no-brainer for it. And Cisco's new mobile security platform has already gained a number of fans among some of the leading telecoms on the planet.
The envelope please
So which is the better buy, Oracle or Cisco? Both are sound, long-term plays, but given Cisco's 3.4% dividend yield -- Oracle's is 1.4% -- and its early leadership position in IoT and data security, each of which could dwarf the opportunities in the highly competitive cloud market, over the long haul, Cisco gets the nod.