Oracle (NYSE:ORCL) stock has traded up about 10% since reporting its fiscal 2017 year-end results. And in this segment from the Motley Fool Money radio show, the cast turns its attention to the headline growth number that is likely to influence the markets. But competing in the cloud is not quite as simple as it seems.
A full transcript follows the video.
This video was recorded on June 23, 2017.
Ron Gross: On Wednesday, Oracle reported better-than-expected results that sent the stock soaring 10% higher. Simon, cloud business getting it done.
Simon Erickson: 67% SaaS growth year over year. That's a sexy number that everyone's going to have the narrative built around. But really, Oracle, I think it's just displacing a lot of their own existing business. Used to be they would send people out to the enterprise, they'd sell a whole bunch of software, the logistics for HR, for budgeting, for whatever it is your large enterprise needed, and they would do it on premise. And now everything is all about the cloud, Ron, so all of that is getting recoded, put onto an Amazon Web Services kind of environment. But now, that's the same basic market that Oracle is wanting to go after, too. So they're building platforms to develop off of, they're putting the software back in the cloud, and they're also doing the hosting, going head-to-head with some big cloud titans out there. They're going to have their existing customer base, it's a sticky business, and switching costs for customers to change from Oracle that they've gotten used to. But I just wonder how big their market can get, and if they can pull new customers away from the guys already out there.
Gross: Help a Luddite like me understand, it seems like the cloud is a commodity business. How does one company, whether it's Amazon or Oracle, differentiate itself from another? Is it really just about switching costs? Once you get with someone, you tend to stick with them?
Erickson: Yes. Typically, cloud-based software, anything software-as-a-service is typically lower margin than anything on premise that you install, you got the maintenance contracts and all that stuff for. But you can get the pie much bigger because, like you said, it's land and expand. You get a customer to use something, you sell them more and more over time. Amazon already has 40% of the cloud-based business in the U.S. The next three are Microsoft, Google, and IBM. They have 25%. And everybody else, including Oracle, is fighting for the rest. So I think it's going to be really tough to displace that. I think a $200 billion market cap, there's a lot of optimism already priced into Oracle's stock price.