Shares of Oracle (NYSE:ORCL) recently tumbled after the tech giant posted mixed first quarter numbers and soft revenue guidance. Oracle's revenue rose just 1% annually (2% on a constant currency basis) to $9.19 billion, marking the company's slowest growth in seven quarters.

The company expects that sluggishness to persist with flat to 2% sales growth (on a constant currency basis) during the second quarter, blaming a "tough comparison" to the prior year quarter's 5% constant currency sales growth.

Two IT professionals walk through a data center.

Image source: Getty Images.

However, Oracle's non-GAAP EPS still rose 18% to $0.71. Its GAAP earnings also climbed 13% to $0.57 per share. 

Oracle doesn't seem doomed, and the stock seems pretty cheap at about 14 times next year's earnings. But the company also isn't giving investors much to look forward to, and the stock has been stuck in neutral over the past year. Let's dig deeper into Oracle's business to identify the key problems.

Oracle's "cloudy" business model

Over the past few years, Oracle has pivoted away from its slower-growth on-premise businesses (like database hardware and software) toward its higher-growth cloud services. Until the third quarter of 2018, Oracle clearly identified these businesses as SaaS (software as a service), IaaS (infrastructure as a service), and PaaS (platform as a service) products.

The growth of its SaaS unit slowed down dramatically throughout fiscal 2018, raising concerns that Oracle couldn't keep pace with its primary rivals Amazon (NASDAQ:AMZN), Salesforce, SAP, and Workday.

 

Q4 2017

Q1 2018

Q2 2018

Q3 2018

SaaS

$1 billion

$1.1 billion

$1.1 billion

$1.2 billion

YOY growth

75%

62%

55%

33%

IaaS/PaaS

$403 million

$400 million

$396 million

$415 million

YOY growth

42%

28%

21%

28%

Cloud revenue growth. Source: Oracle quarterly reports.

But in the fourth quarter, Oracle stopped disclosing those revenues separately and bundled them with its legacy businesses under the far more opaque "Cloud Services and License Support" and "Cloud License and On-Premise License" units.

Many analysts believed that Oracle made that change to reduce investor scrutiny of its cloud services growth. Nonetheless, a comparison of Oracle's fourth and first quarter sales growth reveals the same slowdown under more opaque reporting methods.

 

Q4 2018

Q1 2019

Cloud Services and License Support

$6.8 billion

$6.6 billion

YOY growth

8%

3%

Cloud License and On-Premise License

$2.5 billion

$867 million

YOY growth

(5%)

(3%)

Source: Oracle quarterly reports.

The rest of Oracle's revenue came from the Hardware and Services segments, which together accounted for 19% of its total revenues. Both segments posted single-digit sales declines.

A network of cloud computing connections.

Image source: Getty Images.

During the conference call, Oracle co-CEO Safra Catz claimed that its "public cloud, PaaS, and IaaS" revenues grew "in the 20-plus-percent" range, but didn't disclose any exact growth rates. Catz also noted that ERP (Enterprise Resource Planning cloud) posted over 30% sales growth.

Unfortunately, "20-plus" growth for the SaaS, PaaS, and IaaS units still represents a significant slowdown from previous quarters. It also pales against AWS' (Amazon Web Services) 49% annual sales growth last quarter. To add insult to injury, Amazon plans to completely stop using Oracle's database software by 2020, which could leave a gaping hole in Oracle's top line.

Oracle is treading water, and investors are losing patience

The good news is that Oracle's non-GAAP operating margin remained unchanged year-over-year at 41%, so it isn't getting sucked into a marketing and pricing war against Amazon, SAP, and its other rivals. Its non-GAAP operating expenses rose less than 1% annually. It also anticipates stronger sales growth in the second half of the year.

Oracle also used buybacks to reduce its share count by more than 8.5% over the past 12 months, which will buoy its EPS growth as its sales growth slows to a crawl. Unfortunately, Oracle's opaque reporting methods, slowing sales growth, and timid spending all indicate that its cloud strategy is stalling out.

Therefore, investors would probably be better off buying IBM (NYSE:IBM) as a cloud turnaround play. IBM posted stronger sales growth than Oracle over the past two quarters, it offers investors a clear view of its cloud growth, and it pays a much higher dividend. Investors would also be better off sticking with Amazon, which remains the 800-pound gorilla of the public cloud infrastructure market.