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The New Oracle Looks Like the Old IBM

By Leo Sun - Jun 20, 2019 at 5:00PM

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The tech giant buys another earnings beat as its revenue growth stays sluggish.

Oracle's (ORCL 0.62%) stock recently popped after the tech giant's fourth-quarter numbers beat Wall Street's expectations. Its revenue rose 1% annually (4% on a constant currency basis) to $11.1 billion, beating estimates by $210 million.

Its adjusted net income rose 3% to $4.1 billion, while its adjusted earnings per share -- boosted by buybacks and a lower tax rate -- surged 22% to $1.16 and beat expectations by $0.08. Those growth rates looked decent, but the headline numbers mask some serious issues with the aging tech company.

A worried person looks at stock charts on a computer screen.

Image source: Getty Images.

In fact, the "new" Oracle -- which is trying to grow its cloud services to reduce its dependence on older on-site products -- looks a lot like the "old" IBM (IBM 0.53%). Let's examine the ways Oracle resembles Big Blue, and how these similarities threaten its growth.

Opaque reporting segments mask weak cloud growth

Oracle previously disclosed the growth of its cloud services separately. However, it halted that practice last year and blended the sales with other legacy businesses in two more opaque segments -- cloud services and license support, and cloud license and on-premise license.

These two segments generated 84% of Oracle's sales during the fourth quarter of 2019. At first glance, the two businesses looked healthy during the fourth quarter, with the cloud license and on-premise unit generating double-digit growth.


Q1 2019

Q2 2019

Q3 2019

Q4 2019

Cloud services and license support revenue

$6.6 billion

$6.6 billion

$6.7 billion

$6.8 billion

Segment growth (YOY)





Cloud license and on-premise license revenue

$867 million

$1.2 billion

$1.3 billion

$2.5 billion

Segment growth (YOY)





Data source: Oracle quarterly reports, on a U.S. dollar (not constant currency) basis. YOY = year over year.

However, that growth was inflated by an accounting standard change in fiscal 2019. Excluding that shift, which changed the way subscription services were reported, both units posted roughly flat sales growth from the fourth quarter of 2018.

Meanwhile, Oracle's smaller service and hardware segments -- which generated the rest of its revenue -- continued to wither. Its service revenue fell 7% year over year and its hardware revenue declined 11%.

In other words, most of Oracle's revenue growth can be attributed to an accounting standard change. Its cloud-based businesses, once touted as the company's core growth engines, clearly aren't offsetting the softness of its legacy database and business software businesses.

Servers in a data center.

Image source: Getty Images.

Investors who follow IBM watched the same thing happen over the past few years. IBM often touts the growth of its cloud services, yet it still can't consistently generate positive sales growth.

A crippling addiction to buybacks

One of IBM's worst mistakes under former CEO Sam Palmisano, who resigned in 2011, was its prioritization of buybacks and divestments over acquisitions and investments. As a result, IBM fell behind Amazon (AMZN 5.73%), Microsoft (MSFT 2.26%), and Alphabet's Google in the public cloud market.

Oracle is now following that pattern by "buying" earnings beats with buybacks instead of "earning" them with higher-margin sales growth. Oracle spent a whopping $36 billion, over two-thirds of its free cash flow, on buybacks throughout fiscal 2019. Those buybacks boosted its EPS growth and tightened its valuation by reducing its diluted share count by 16% -- but did absolutely nothing to widen its moat or strengthen its cloud businesses.

Oracle needs to spend more cash on acquisitions or strategic investments instead of buybacks. Otherwise rivals like Amazon -- which is targeting Oracle's core business with cloud-based database services on AWS (Amazon Web Services) -- could cause a lot of pain.

Warren Buffett dumped both stocks

Warren Buffett's Berkshire Hathaway (BRK.A 0.73%) (BRK.B 0.75%) once owned multibillion-dollar stakes in IBM and Oracle. However, Berkshire sold all of its IBM shares last year and dumped its entire stake in Oracle earlier this year -- after holding the stock for just a single quarter.

Buffett later told CNBC that he sold his Oracle stake because he "didn't understand the business," and that his exit was influenced by his "experience with IBM." When the Oracle of Omaha dumps two classic tech stocks for similar reasons, investors should take note.

The bottom line

Oracle is an aging tech company that lacks real growth engines and repeatedly props up its earnings with buybacks. It's stuck in the same downward spiral as IBM used to be, and it lacks the motivation of IBM under Ginni Rometty to break the cycle. Therefore, I'd avoid Oracle and stick with stronger tech companies -- like Amazon or Microsoft -- even though they trade at higher valuations.

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