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Better Buy: Cisco Systems vs. Oracle

By Robert Izquierdo – Aug 3, 2020 at 12:30PM

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Which tech giant is the better investment in the cloud computing era?

Cisco Systems (CSCO 2.22%) and Oracle (ORCL 4.14%) were once dominant Silicon Valley tech titans, but the advent of cloud computing transformed the IT industry and changed the fortunes of both companies. As cloud computing allowed businesses to outsource much of their IT infrastructure to third parties, the demand for Cisco and Oracle's on-premises solutions declined.

Now the global coronavirus pandemic is injecting new uncertainty. How is each impacted by the economic downturn brought on by the pandemic? Is one clearly a better investment choice? Let's look at each to determine the answers.

A ring of laptops connect into a cloud icon sitting on a pedestal in the center of the laptops.

Image Source: Getty Images.

Cisco's SaaS solution

As Cisco's fiscal year just wrapped up in July, it marks a challenging time for the company. Its computer networking hardware business, under the company's Infrastructure Platforms division, faced supply chain difficulties from the U.S. trade war with China last year, and now the coronavirus pandemic as well.

Supply chain issues caused this division to experience a 15% year-over-year revenue decline in the third quarter, which ended April 25. This is a blow for Cisco, as the division accounted for $6.4 billion of Q3's $12 billion total revenue.

The company is transforming itself to reduce reliance on its core hardware business. Cisco is growing its software and subscription-based revenue to benefit from the software-as-a-service (SaaS) model, which provides a steady revenue stream.

Its strategies are working. Cisco has grown revenue for the past three years.

CSCO Revenue (Annual) Chart

Data by YCharts.

Software subscriptions accounted for 74% of software revenue in Cisco's third quarter. This is up from 65% last year.

Cisco maintains a healthy business despite the pandemic. Total gross margin rose to 64.9% in the third quarter, compared to last year's 63.1%. Operating expense went down 6%. Cash, cash equivalents, and investments stood at $28.6 billion, up from the second quarter's $27.1 billion, strengthening the company's ability to weather the pandemic-induced economic slowdown.

Oracle's battle in the cloud

The advent of cloud computing has forced Oracle to transition its business to cloud-based offerings. It now offers several cloud products, with its autonomous database, which uses artificial intelligence to automate deployment and management of databases, serving as a competitive differentiator.

In its fourth quarter, which ended May 31, the company returned to an on-premises database option by enabling its cloud database technology to run in a customer-owned data center. This capability is essential for Oracle's largest clients in the financial and government sectors, which need a high degree of data security.

Even so, its offerings could not offset the pandemic's impact, resulting in Q4 revenue declining 6% year over year. The pandemic adversely affected revenue for many companies, but Oracle's revenue growth was modest even before the pandemic.

 

Fiscal Year Revenue
2020 $39.1 billion
2019 $39.5 billion
2018 $39.4 billion

Data source: Oracle.

Oracle's cloud services and license support segment, which accounted for 70% of the company's revenue in fiscal year 2020, experienced growth over the past three years, albeit at a gradual pace.

Fiscal Year Cloud Services and License Support Revenue Percent of Total Revenue
2020 $27.4 billion 70%
2019 $26.7 billion 68%
2018 $26.2 billion 66%

Data source: Oracle.

Although the cloud computing market is expected to grow to $364.1 billion in 2022 from last year's $242.7 billion, according to Gartner, Oracle is battling against larger rivals for customers, including Amazon. The fierce competition makes it challenging for Oracle to capture outsized sales, but the company's modest growth shows it's holding its own. As the cloud computing market grows, Oracle's cloud products will benefit, allowing the company to sustain its modest revenue growth.

Oracle's financial health is excellent, so getting through the pandemic won't be an issue. The company exited the fourth quarter with a staggering $37.2 billion in cash and equivalents, which easily covers its total current liabilities of $17.2 billion.

The final verdict

Oracle successfully transitioned its solutions to cloud computing. Its growth is modest, but it's financially healthy. Oracle is a steady rock in the pandemic storm, though it competes in a crowded cloud computing space.

Cisco found its path forward by transitioning its software solutions to an SaaS model, and its revenue growth prior to the pandemic shows it was making progress. Whether it's successful post-pandemic remains to be seen, but in the years ahead Cisco looks forward to the rollout of 5G networks and the Internet of Things to help power demand for its networking and software products.

Both offer dividends, but Cisco's yield of 3.11% handily beats Oracle's 1.73%, making Cisco a solid income stock. This, coupled with Cisco's strong position in the computer networking arena and diversified product portfolio, makes Cisco the better investment. 

Robert Izquierdo owns shares of Cisco Systems. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$41.82 (2.22%) $0.91
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$65.69 (4.14%) $2.61

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