At the time, I predicted investors would continue to pay a premium for Microsoft's stock as long as its cloud business was firing on all cylinders. I noted that Oracle's stock looked cheap, but its revenue growth was tepid and it relied too heavily on big buybacks to "buy" earnings beats.
Microsoft's stock price has rallied about 40% since I wrote that article, but Oracle's stock has advanced more than 50%. Let's see if I overestimated Microsoft and underestimated Oracle and if the slower-growth tech company will remain ahead of its higher-growth peer for the rest of the year.
A tale of two cloud transitions
Microsoft and Oracle have both expanded their cloud-based businesses over the past few years to offset their dependence on legacy software and services.
Microsoft's cloud transformation accelerated significantly after Satya Nadella took over as Microsoft's third CEO in 2014. Under Nadella, Microsoft expanded its cloud infrastructure platform Azure, transformed most of its productivity software into cloud-based services, expanded its mobile apps on iOS and Android, and launched new Surface and Xbox products.
Oracle's cloud expansion was initially led by co-CEO Mark Hurd, who oversaw the company's acquisition of NetSuite and several other cloud service companies. Hurd passed away in 2019, but his co-CEO Safra Catz (who now leads the company as its sole CEO) is continuing those expansion plans.
A flashier turnaround vs. a low-key turnaround
Microsoft's turnaround was easy to see. It turned Azure into the world's second-largest public cloud platform after Amazon Web Services (AWS), turned Office 365 and Dynamics into big cloud businesses, and launched Windows 10 as a "last" version of its flagship OS in its transition into a cloud-based service.
Oracle's transformation was less visible. It gradually transformed its on-premise database software into cloud-based services, then transformed its enterprise software business into cloud-based subscriptions with its Fusion and NetSuite ERP (enterprise resourcing planning) services. Yet those low-key moves enabled its revenue to finally grow again.
Microsoft is still growing at a faster rate
Microsoft's revenue and adjusted earnings rose 12% and 14%, respectively, in fiscal 2020, which ended last June. Its enterprise software sales slumped during the pandemic, but the growth of its cloud, gaming, Surface, and consumer-facing software segments all offset that slowdown.
In the first nine months of fiscal 2021, Microsoft's revenue and adjusted earnings rose 16% and 35% year over year, respectively. Its growth accelerated as its enterprise software business recovered, as its commercial cloud business -- which generated 42% of its revenue in the third quarter -- continued to grow at high double-digit percentage rates.
Analysts expect Microsoft's revenue and earnings to grow 16% and 35%, respectively, for the full year. Those growth rates are impressive, but the stock isn't cheap at 30 times forward earnings. Its forward yield of 0.9% also won't attract any serious income investors.
Oracle's revenue fell 1% in fiscal 2020, which ended last May, as slower enterprise spending during the pandemic throttled its growth. However, its adjusted earnings grew 9% as it ramped up its buybacks.
But in the first nine months of fiscal 2021, Oracle's revenue and adjusted earnings grew 2% and 18% year over year, respectively. Its revenue increased throughout all three quarters as rising demand for its cloud services offset the pandemic's impact on its on-premise software businesses.
Analysts expect Oracle's revenue and earnings to grow 3% and 16%, respectively, this year. It's growing at a much slower rate than Microsoft, but its stock is also significantly cheaper at 17 times forward earnings. Oracle also pays a higher forward dividend yield of 1.6%.
Oracle is a slightly better buy than Microsoft (for now)
I believe Microsoft and Oracle are still both solid long-term investments. However, Oracle could remain ahead of Microsoft this year for one simple reason: the current market trend that involves a rotation from growth to value stocks.
As bond yields rise, some investors will likely swap their pricier tech stocks for cheaper ones with higher dividend yields. That shift, which could easily last through the end of 2021, favors Oracle.
Oracle also has brighter long-term prospects than many other aging tech companies that are trying to expand their cloud businesses. Therefore, Microsoft might catch up to Oracle and overtake it again over the next few years, but it could underperform its slower-growth peer for the rest of the year.