Though it came late to the cloud wars, Oracle (ORCL +0.07%) is making up for lost time. It may not be quite the cloud leader that co-founder and CTO Larry Ellison and his team claim that it is, but that simply means its push into this burgeoning market offers even more upside.
Microsoft (MSFT +0.94%), by contrast, is a cloud industry veteran that has been focusing its transformation efforts on fast-growing markets since shortly after CEO Satya Nadella took the reins in 2014. Both industry behemoths are focused on the cloud, but both are also diving headlong into other markets with similarly tremendous potential, including virtual reality (VR) and artificial intelligence (AI).
Employees at HQ. Image source: Oracle.
The case for Oracle
Investors seem to have finally gotten on board with Oracle's push to become a cloud and software industry leader. Its stock is up 16% year to date largely due to the company's rapid growth in its new-ish, key areas.
Last quarter, the combined revenue of Oracle's cloud software-as-a-service (SaaS) and platform-as-a-service (PaaS) segments -- widely recognized as its two fastest-growing businesses -- came in at $1.01 billion, a whopping 73% year-over-year jump. Factor in a more modest, but still strong, 17% improvement in cloud infrastructure sales to $178 million, and it's easy to understand why investors like what they see.
The previous quarter (fiscal Q2 2017) marked the first time Oracle hit the magic $1 billion in cloud revenue plateau. Just one quarter later, and Oracle's $1.19 billion in cloud sales accounts for 13% of total revenue. But it knows the future is more than the cloud. Its decision to open a new "Solution Engineering" internal start-up is a testament to its commitment to carving out a space for itself in the hottest new tech areas, including VR, AI, and big data. Clearly, Ellison doesn't intend to let Oracle be late to the party again.
Innovations such as Oracle's recently released "adaptive intelligent apps," which offer AI functionality to customer service professionals, are the sorts of things investors will see a great deal more of from Oracle in the months and years ahead.
Microsoft's cloud reach. Image source: Microsoft.
The case for Microsoft
Another quarter, another jump in cloud revenue. That wasn't the only important news in Microsoft's recently announced fiscal Q3 2017 report, but it bodes well for Nadella's "cloud-first" initiative. With an annual revenue run-rate of more than $15.2 billion, Microsoft remains at the head of the class in the competitive cloud wars.
"Strong execution and demand for our cloud-based services drove our commercial cloud annualized revenue run rate," said CFO Amy Hood. Microsoft is also making significant strides in its non-cloud productivity and business processes units. The staggering $26.2 billion it paid for LinkedIn may have left some pundits scratching their heads, but the acquisition is already paying dividends
LinkedIn contributed $975 million to Microsoft's $22.1 billion in revenue for the quarter, which was up 8% year-over-year. Like Oracle, Microsoft's portfolio of software products, most of which are delivered via the cloud, continues to perform. Commercial Office 365 sales jumped 45% last quarter, in line with its ongoing pattern for more than a year.
With the advent of Windows 10, even Microsoft's long-beleaguered Bing search engine is hitting on all cylinders. Search revenue improved 8% last quarter, and even gaming sales showed a 4% improvement over a year ago. Toss in Microsoft's augmented reality (AR) market leadership position, and its artificial-intelligence-driven data analytics initiatives, and the future looks awfully bright.
Which is the better buy?
Though their dividend yields aren't exactly industry-leading -- Oracle's yield is 1.7% and Microsoft's is 2.3% -- those payouts are bonuses for investors. And both Oracle and Microsoft offer significant growth potential despite the fact they're bumping up against their respective 52-week share price highs.
However, when all is said and done, Microsoft has the edge as the better buy today because it's further along in its transition -- by a wide margin -- than Oracle. And even though Microsoft is leading the pack in many key markets, it's still just scratching the surface of the potential in some new technology segments that most pundits agree offer almost unlimited upside.
