Oracle (ORCL 2.02%) posted its latest earnings report on June 12. For the fourth quarter of fiscal 2023, which ended on May 31, the enterprise software company's revenue rose 17% year over year (18% in constant currency terms) to $13.8 billion and exceeded analysts' expectations by $110 million. Its adjusted earnings per share (EPS) grew 8% to $1.67 and cleared the consensus forecast by $0.09.
For the full year, Oracle's revenue rose 18% (22% in constant currency terms) to $50 billion as its adjusted EPS grew 4% to $5.12. Its top line growth was significantly boosted by its acquisition of the healthcare IT company Cerner last June.
Those growth rates look healthy, but its stock has already rallied more than 70% over the past 12 months and is trading near its all-time highs. Is it too late for investors who missed out on that rally to buy the stock today?
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Why is Oracle's stock trading at its all-time high?
Oracle is the world's largest database software company. Over the past decade, the market's demand for its on-site database products cooled as large organizations shifted toward cloud-based services.
To keep pace with that paradigm shift, Oracle aggressively transformed its on-site software into cloud-based services. It accelerated that transition by acquiring the cloud-based enterprise software provider NetSuite in 2016, expanding its own public cloud infrastructure platform, and launching more cloud-based enterprise resourcing planning (ERP) services like Fusion to increase the stickiness of its ecosystem.
But for many years, the slower growth of Oracle's legacy on-site services offset the stronger growth of its newer cloud-based services. In fiscal 2020, its revenue declined 1%. At the time, the bears assumed Oracle would suffer the same fate as IBM and need to resort to aggressive cost-cutting and buybacks to grow its EPS.
Yet between fiscal 2020 and fiscal 2023, the size of Oracle's strategic back-office software-as-a-service (SaaS) business -- the core growth engine of its cloud services, which include NetSuite and Fusion -- more than doubled. As a result, Oracle's revenue rose 4% in fiscal 2021, 5% in fiscal 2022, and 7% on an organic basis (excluding Cerner) in fiscal 2023.
That acceleration silenced the bears and suggests that Oracle should be compared to Adobe or Microsoft, which successfully evolved into higher-growth cloud-based software companies, instead of IBM.
CEO Safra Catz attributed Oracle's accelerating revenue growth in fiscal 2023 to its cloud applications and infrastructure businesses, "which grew at a combined rate of 50%" in constant currency terms. Catz also said the accelerating growth of its cloud-based software and infrastructure business bodes well for another strong year in fiscal 2024.
Even as Oracle expanded its cloud business, it set aside enough cash to repurchase 12% of its shares over the past three years. Those consistent buybacks boosted its adjusted EPS by 21% in fiscal 2021, 5% in fiscal 2022, and 4% in fiscal 2023. Oracle's free cash flow (FCF) also rose from $5 billion in fiscal 2022 to $8.5 billion in fiscal 2023, giving it plenty of cash for more buybacks and dividends, and Catz expects very good results in its FCF for fiscal 2024.
Can Oracle keep growing in fiscal 2024?
For the first quarter of fiscal 2024, Oracle expects its revenue to rise 8% to 10% year over year (and 7% to 9% in constant currency terms) as it laps its acquisition of Cerner. It forecasts its total cloud revenue (excluding Cerner) to rise 28% to 30% year over year in constant currency terms, compared to its 33% growth on the same basis in the fourth quarter. On the bottom line, it expects its adjusted EPS to grow 9% to 13%.
Oracle didn't provide any guidance for the full year, but analysts expect its revenue and adjusted EPS to rise 7% and 9%, respectively. Those growth rates are stable, and its stock still looks reasonably valued at 21 times forward earnings. For reference, Microsoft -- which is forecast to grow slightly faster than Oracle in fiscal 2024 (which starts at the end of June) -- trades at 30 times forward earnings. IBM, which is growing much slower than Oracle, trades at 15 times forward earnings.
Oracle's forward dividend yield of 1.5% can't match IBM's 4.8%, but it's much higher than Microsoft's 0.8%. Oracle only spent 43% of its FCF on its dividends throughout fiscal 2023, so it still has plenty of room for future hikes.
It's not too late to buy Oracle
Oracle's market-beating gains likely stunned many investors who had previously dismissed it as a slow-growth tech giant. But the accelerating growth of its cloud businesses, strong cash flows, and disciplined balance of investments, acquisitions, and buybacks all justified those gains. And thanks to its consistent earnings growth, its stock still doesn't look expensive relative to its peers.
In short, it's not too late to buy Oracle -- even though it's already trading at its record highs.
