If you listen to Oracle's (NYSE:ORCL) recent earnings call, the future of the software giant looks bright. For instance, Chairman and Chief Technology Officer Larry Ellison described the company's autonomous database for on-premises clouds as a "gigantic shift" and "one of our biggest and hottest new products ever." That's quite a strong statement for a 43-year-old tech giant that has  grown its revenue to $39.1 billion over the last 12 months.

However, investors should remain cautious. As the company has been undergoing its transition to a cloud-focused model, solid revenue growth has yet to materialize. Instead, it has delivered several years with a fairly flat top line.

How Oracle's cloud transition is progressing

Oracle's fiscal fourth-quarter results were underwhelming compared to guidance: Revenue dropped 4% year over year in constant currency to $10.4 billion.

Metric Guidance Fiscal Q4 Results
Revenue growth (constant currency) (2%) to 2% (4%)
Non-GAAP earnings per share $1.20 to $1.28 $1.20

Daa source: Oracle. GAAP = generally accepted accounting principles.

Its clients in the hospitality, retail, and transportation industries have deferred projects because of coronavirus-induced challenges. That was visible in the company's cloud license and on-premise license segment, where revenues dropped 22% year over year in constant currency to $2.0 billion.

Beyond that weak top-line performance, the company posted some strong results, though.

It improved its operating margin from 38% a year ago to 41%. That was driven partly by a pandemic-related reduction in travel expenses and sales commissions. But the company's impressive operating margin is also due to its large scale and relatively low operating expenses. Sales and marketing expenses often soak up more than half of the revenue of many high-growth software-as-a-service (SaaS) specialists. By contrast, Oracle spent only 19% of its revenue on sales and marketing expenses, down from 21% one year ago.

Also, Oracle's cloud-based applications for enterprises to manage their processes and human resources kept on delivering strong double-digit revenue growth. Fusion Enterprise Resources Planning (ERP) and Fusion Human Capital Management (HCM) were up 35% and 29%, respectively. And NetSuite, Oracle's cloud ERP solution for midsize enterprises, grew 25% year over year.

In mid-2018, management stopped disclosing the performance of its total cloud businesses, however, as CEO Safra Catz highlighted during the earnings call, "We are now at a point where our growing businesses are now larger than our declining businesses."

That statement is key. If Oracle's cloud solutions keep delivering strong growth, the headwinds from declining sales of on-premises products will become less and less visible, which will accelerate revenue growth.

Man using laptop for working with cloud applications.

Image source: Getty Images.

Investors should be cautious of management's excessive optimism

In addition to the strong performance of the company's cloud applications Fusion ERP and HCM, management kept boasting about Oracle Cloud Infrastructure's (OCI) superior offerings in terms of performance, price, and security.

But it's necessary to remember that Ellison had shown excessive optimism about his company's prospects in the past. Speaking about cloud computing during the Oracle Openworld 2016 keynote, he said Amazon's lead was over. Compare that statement with AWS and Oracle's OCI respective market shares in 2019: A study from the research company Canalys indicates AWS remained the leading cloud infrastructure provider with 32.3% of the market. In contrast, Oracle doesn't appear in the list of top five providers -- and Alibaba Group Holding's Alibaba Cloud occupies the fifth spot with only a 4.9% share.

Also, during the earnings call, Larry Ellison discussed the decision of the booming video communications specialist Zoom to use Oracle's cloud: "I think Zoom was shocked when they looked at the results after they moved their application to Oracle, and we were faster, much faster, and we were much less expensive and we were more secure."

However, from the perspective of Zoom's management, the story looks different. Answering an analyst's question about the Oracle deal during the last earnings call, Zoom CFO Kelly Steckelberg explained Zoom will be scaling its own infrastructure to reduce costs compared to using third-parties such as Oracle and Amazon: "[...] we scaled up with third-party resources to help us. And over time, we'll look to backfill those with direct employees, which is more cost-effective, but helped us get through this unprecedented increase in demand."

Further, over the last several earnings calls, Larry Ellison had asserted that Oracle was working with some of the largest customers of its competitor SAP to migrate them to Fusion ERP. But SAP CEO Christian Klein dismissed these statements in an interview given at the beginning of the year. 

Whatever the truth is in these matters, investors should take Oracle management's optimism with a grain of salt. Besides, strong results have yet to materialize. Based on the midpoint of guidance, revenue should grow by only 1% in constant currency next quarter. And because of coronavirus-induced uncertainties, management hasn't provided full-year guidance.

Looking ahead

In any case, the market values Oracle at a trailing-12-month price-to-earnings ratio of 17.2.

If you share management's optimism, that valuation looks reasonable. But given the elements I discussed, I intend to stay on the sidelines until the giant tech company delivers a few quarters of solid revenue growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.