Oracle (ORCL -0.97%) may not be the biggest cloud player, but its business model may be one of the most defensive. Unlike many cloud stocks, most of the company's earnings are derived from recurring software and cloud infrastructure revenue. Other cloud players have non-cloud segments that could be negatively affected by a slowing global economy. Here's how it works.
Resilient business model
For decades, Oracle's legacy Enterprise Resource Planning (ERP) software has given its enterprise customers everything they need to run their multinational companies. ERP software handles everything from accounting, to project management, to compliance and supply chain operations. Oracle and its leading competitor, SAP, continue to dominate the space. The duopoly has treated the companies well over the years as the two companies collect recurring revenue from a growing list of contracted customers regardless of economic conditions.
Times have changed for software companies, and Oracle has embraced it. The company has built out its cloud infrastructure to allow its customers to migrate their software to the cloud and hire Oracle as their cloud service provider. Bundling the two services gives customers a cost and time advantage compared to hiring separate vendors for both.
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In its recently reported full-year financial results, Oracle noted that recurring revenue in its two cloud software offerings, Fusion ERP and NetSuite ERP, were up 20% and 27%, respectively. Its contracted cloud hosting service revenue was up 36% for the year.
With its recently closed acquisition of healthcare infrastructure company Cerner, Oracle will have an incredible opportunity to expand its defensive business. The combined business will allow Oracle to cross-sell its ERP software and cloud infrastructure services to Cerner's 27,000 customers.
Defensive MVP
Oracle may not be the first name that comes to mind when investors think of cloud stocks. Alphabet's Google Cloud, Microsoft Azure, and Amazon Web Services are the biggest players, but they come packaged with other business segments.
For instance, Google Cloud represented less than 10% of Alphabet's total revenue in the first quarter of 2022. Advertising represented 80% and fell nearly 11% from its previous quarter. Advertising revenue tends to dip during economic slowdowns, making the stock less defensive.
AWS made up 16% of Amazon's total revenue in the first quarter of 2022. Online and physical retail made up 70%, and advertising 7%. These businesses are also less defensive and will likely slow if the U.S. economy continues to stagger.
On the other hand, Oracle's cloud and licensing revenue made up 85% of its total revenue for the year ending in May. The company's software and cloud hosting revenue are recurring, meaning customers are locked into these services for multiple years in many cases. Oracle's business model is resilient and may make it one of the most defensive cloud stocks in the sector.
Beyond being a defensive business, growth prospects in Oracle's cloud hosting infrastructure business look attractive. In Oracle's full-year earnings press release, CEO Safra Catz remarked: "This Q4, we also experienced a major increase in demand in our infrastructure cloud business -- which grew 39% in constant currency. We believe that this revenue growth spike indicates that our infrastructure business has now entered a hyper-growth phase."
Unlike most defensive stocks, Oracle shares are down 18% year to date. However, the decline may offer investors a great valuation. The shares trade at a forward price-to-earnings ratio of 13.3 , cheaper than Alphabet at 19 and Amazon at a head-turning 70.
Oracle's shares may be a rare combination of defense and growth. If the market continues to tank in the coming months, Oracle stock may be one of the best-performing cloud stocks.
