Is Oracle Stock a Buy Now?

Oracle's (ORCL 0.49%) stock price jumped 10% on June 14 after the enterprise software company posted its Fiscal 2022 fourth-quarter earnings report (for the quarter ending May 31). Its revenue rose 5% year over year (or 10% in constant currency terms) to $11.84 billion, which beat analysts' estimates by $190 million.

Its adjusted net income fell 6% year over year to $4.24 billion, but its adjusted earnings per share (EPS) -- buoyed by $600 million in buybacks -- stayed flat at $1.54 and topped estimates by $0.16. On a generally accepted accounting principles (GAAP) basis, its net income fell 21% to $3.19 billion.

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Oracle's headline numbers might seem uninspiring, but its stable top-line growth, consistent profitability, low valuation, decent dividend, and aggressive stock buybacks all make it a compelling investment in this volatile market, which favors value over growth stocks.

So should investors buy some shares of Oracle as a defensive play against a potential recession?

What does Oracle do?

Oracle is the world's largest database management software company. Most of its software was originally installed on-site, but it's been transforming those on-premise solutions into cloud-based services over the past few years to lock its customers into stickier subscriptions.

Oracle also acquired a long list of companies to expand that ecosystem with enterprise resource planning (ERP) services. Last December, it agreed to buy Cerner for $28.3 billion in cash to expand that reach into the healthcare IT services market. It closed that deal in early June, and it expects Cerner to become a "huge additional revenue growth engine" and accretive to its adjusted EPS in the first full fiscal year.

That inorganic growth should widen Oracle's moat against its competitors in the cloud-based database market, which includes Amazon Web Services (AWS), Microsoft's Azure, and Alphabet's Google Cloud. All those tech giants bundle their database services into their respective cloud platforms. Oracle also provides its own cloud infrastructure platform, OCI, but it's still much smaller than those three market-leading platforms.

Its revenue growth is accelerating again

Oracle's growth stalled out in fiscal 2019 and fiscal 2020 (which ended in May of the calendar year) as the growth of its cloud-based services cooled and failed to offset the slower growth of its legacy on-site services. That slowdown even caused Warren Buffett's Berkshire Hathaway, which was initially impressed by Oracle's stable growth and big buybacks, to sell its entire position in early 2019. Oracle co-CEO Mark Hurd, who had led Oracle's cloud expansion, also passed away later that year.

But over the past two years, Oracle's revenue growth stabilized and accelerated again. Its consistent buybacks, which reduced its outstanding share count (on a diluted weighted average basis) by 33% over the past five years, also enabled it to generate rock-solid earnings growth.

Data source: Oracle. YOY = Year over year.

Oracle attributed its strong recovery to the market's increased adoption of its OCI, Fusion ERP, and NetSuite ERP cloud-based services. In fiscal 2022, its total cloud services and license support revenue rose 6% to $30.2 billion, or 71% of its top line, accelerating from its 5% growth in fiscal 2021.

Within that total, its higher-growth cloud services revenue rose 22% to $10.8 billion in 2022. It expects that segment (excluding Cerner) to grow about 30% organically in constant currency terms in fiscal 2023.

A promising start to fiscal 2023

During the fourth-quarter conference call, CEO Safra Catz said, "Despite the macro environment, we continue to expect the revenue growth in our cloud business will accelerate substantially in fiscal year '23." Catz also said that Oracle's "fundamental principle going forward is to grow non-GAAP EPS while accelerating cloud revenue growth."

For the first quarter of 2023, Oracle expects its total revenue, including Cerner, to rise 20% to 22% year over year in constant currency terms -- or 17% to 19% in USD terms at today's exchange rates.

Within that segment, it expects its total cloud revenue, excluding Cerner, to grow 25% to 28% in constant currency terms. Including Cerner, it expects its total cloud revenue to rise 47% to 50% in constant currency terms. It expects its adjusted EPS to increase by about 1% to 5%.

Oracle's acquisition of Cerner will add about $15.8 billion in debt to its $19.5 billion in total liabilities at the end of the fourth quarter. However, Catz still expects the company to repurchase about $600 million in shares for the next few quarters until it can better assess its debt levels.

A bright future and a reasonable valuation

For the full year, analysts expect Oracle's revenue and GAAP EPS (including Cerner) to increase by 18% and 63%, respectively. Based on those expectations, Oracle trades at a reasonable 18 times forward earnings while paying out a healthy forward dividend yield of about 1.8%.

Oracle might seem like a dull investment for growth-oriented investors, but I believe it's precisely the kind of defensive stock you want to own in this turbulent market.