Oracle (ORCL -0.39%) isn't an exciting tech stock. The enterprise software company is over four decades old, and it generates anemic sales growth compared to bigger cloud leaders like Amazon (AMZN -1.65%) and Microsoft (MSFT -2.45%). It's also often criticized for "buying" earnings beats with aggressive buybacks instead of growing its core business.
Yet Oracle's stock price has still rallied 75% over the past five years, and it delivered a total return of about 90% after including reinvested dividends. That growth still pales against Microsoft and Amazon's triple-digit percentage gains during the same period, but Oracle has remained much more resilient than other aging tech giants like IBM (IBM -8.25%).
It should also easily survive the next market crash, for five simple reasons.
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1. Slow and steady wins the race
Oracle, like IBM and other older enterprise software companies, saturated its core market over the past few decades. But a newer generation of cloud-based services, which were generally easier to scale than on-premise software, disrupted that creaky old market.
That paradigm shift forced the older tech giants to adopt fresh cloud-based strategies. Some companies, like Microsoft, were successful. Others, like IBM, were not. Oracle's cloud-based turnaround efforts were more successful than IBM's but less impressive than Microsoft's.
Oracle's turnaround included two main strategies. First, it pivoted its on-site database and enterprise software toward cloud-based services. Second, it aggressively acquired other cloud-based companies, such as NetSuite in 2016, to expand its ecosystem of enterprise cloud services.
Those efforts gradually paid off, and Oracle's revenue rose 2% year over year in the first half of fiscal 2021 (which started last May) as the growth of its cloud services offset the sluggishness of its on-premise business. Analysts expect its revenue to rise about 3% in both fiscal 2021 and 2022.
2. Stable operating margins
Oracle's non-GAAP operating margin remained unchanged at 44% in fiscal 2019 and 2020. In the first half of 2021, it expanded year over year from 42% to 46% as its operating expenses declined 5%.
Those rising margins indicate Oracle isn't spending too much cash on its cloud-based transformation, and that it still enjoys plenty of pricing power in the competitive enterprise software market.
3. Its buybacks were beneficial
The bears often claim that Oracle's aggressive buybacks, which used up over 100% of its free cash flow over the past 12 months, were only deployed to squeeze out EPS growth from its stagnant revenue.
Image source: Getty Images.
That criticism is fair, but Oracle's buybacks were also well-timed, and they reduced its outstanding share count by nearly 42% over the past decade. That's a refreshingly honest and effective approach compared to other tech companies, which often use buybacks to offset dilution from stock-based bonuses.
Analysts expect Oracle's ongoing buybacks, along with its stable sales growth and rising margins, to boost its earnings by 13% this year and 7% next year. By comparison, IBM -- which significantly reduced its buybacks over the past two years -- is still struggling with sliding revenue and profits.
4. It's a cheap dividend pick in a frothy sector
Oracle trades at 14 times forward earnings and pays a forward dividend of 1.5%. It hasn't raised that payout in over two years, but its low payout ratio of 28% gives it plenty of room for future hikes.
That low valuation and decent yield should make Oracle an attractive pick, especially if higher interest rates and other macro headwinds cause investors to rotate from growth stocks toward value plays.
5. A comfortable cash cushion
When the market crashes, investors will scramble to companies with strong cash flows and balance sheets. Oracle generated $12.1 billion in free cash flow over the past 12 months, and it ended its latest quarter with $28 billion in cash and equivalents, as well as $10.6 billion in marketable securities.
In other words, Oracle still has plenty of cash to deploy on investments, acquisitions, dividends, and buybacks -- and it should be in a good position to easily withstand the next economic downturn, even as younger tech companies with more fragile balance sheets resort to secondary offerings and other desperate tactics to stay afloat.
The bottom line
Oracle isn't an ideal investment for growth-oriented investors, but it should easily survive the next market crash. Sometimes it's smarter to bet on the tortoise than a drove of exhausted hares.
