Oracle's (NYSE:ORCL) management surprised investors last week by announcing a significant increase in its capital expenditures. But what will that increased investment actually mean to investors? This planned capex bump may help the tech giant enhance gains, as it has experienced massive growth in parts of its cloud business. However, it also disrupts a profitable but slow-growth business and could bring uncertainty to the pace of Oracle's recent stock price increases.

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The state of Oracle stock

In past decades, Oracle was a market leader in databases and enterprise software. Though competitive threats dramatically slowed Oracle's revenue increases, the company managed to deliver steady gains for shareholders. Its stock price has risen by nearly 50% over the last 12 months and by about 145% over the previous 10 years. This occurred as Oracle embarked on a massive stock buyback program, cutting the share count from over 5 billion in 2011 to less than 2.9 billion today.

ORCL Chart

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It also began paying dividends in 2009. The annual payout has increased every year since payouts began. Additionally, the company raised the yearly per-share dividend from $0.96 per year to $1.28 earlier this year, taking the cash return to about 1.7%.

Changes to its business

Investors may have to reevaluate the stock now that Oracle has shifted its focus more to the cloud. Management feels the company holds a competitive advantage in the cloud due to the "completeness" of its offering. Unlike competitors, Oracle views the cloud in terms of application, platform, and infrastructure layers. Many of its competitors only focus on one of these aspects.

Since it participates in all layers of the cloud, it can apply its longtime expertise in databases and enterprise software to add integrations to such layers. To this end, Oracle announced on the Q4 2021 earnings call that it plans to spend about $4 billion in fiscal 2022 for cloud integrations alone. This is nearly double the $2.1 billion Oracle spent on capex in fiscal 2021.

Market research firm Research and Markets forecasts cloud spending will grow at a compound annual growth rate (CAGR) of 18% through 2025. While that presents an opportunity, Oracle holds a negligible share of the overall cloud market, though it claims 6% of the software-as-a-service (SaaS) public cloud, according to cloud hosting company Kinsta.

Oracle's moves into the cloud have come relatively late compared to established plays like Amazon's AWS and Microsoft's Azure. Also, companies like IBM will challenge Oracle more directly on cloud integration. IBM's Red Hat division offers a hybrid cloud product that allows public and private clouds to interact seamlessly, presenting a direct challenge to Oracle Integration.

Oracle's financials

Moreover, the company's financials have given stockholders an incomplete picture of its cloud success. For instance, Oracle recently reported that in Q4, Fusion ERP revenue surged 46%, Fusion HCM revenue rose 35%, and NetSuite ERP revenue increased 26%. However, this growth did not translate into significant yearly increases in overall revenue. Oracle's 2021 revenue grew by 4% versus 2020 levels, coming in at $40.5 billion. The two cloud divisions experienced only a 5% revenue increase, although they were the only divisions to show an annual increase in revenue.

Oracle also reported GAAP net income of just over $13.7 billion, a 36% increase from year-ago levels. This occurred primarily because of a $747 million income tax benefit, a significant change from the more than $1.9 billion in income tax expenses for 2020. On a non-GAAP basis, net income surged 11% as the company slightly reduced its operating expenses.

Investors have stuck with Oracle despite slower growth due to one critical factor -- cash flow. In fiscal 2021, Oracle generated almost $13.8 billion in free cash flow. This has allowed Oracle to invest heavily in the aforementioned stock buybacks. In the last year, the company bought back 329 million shares at $21 billion, not including the $3 billion spent on dividends. With the payout increase, that cost will rise significantly in fiscal 2022.

To cover this spending, Oracle added about $6.8 billion in noncurrent notes payable and nearly $6 billion in current notes payable. This took the stockholders' equity, or the company's value after liabilities are subtracted from assets, down to $6 billion, less than half the $12.7 billion reported at the end of fiscal 2020. With such spending becoming less sustainable, investors may have to brace for reduced stock buybacks, lower liquidity, or higher debt in the upcoming year.

Investor takeaways

The increased cloud investment shows Oracle is not going to rest on its laurels. However, with Oracle giving investors a limited view on cloud growth, it remains unclear how the faster-growing parts of its cloud division will translate into overall revenue increases. 

Moreover, its pace of buybacks is not sustainable and will probably become less so as capex rises. While the increase in capex may keep Oracle competitive in the market, it could also slow growth in this tech stock for the foreseeable future.

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.