Oracle (ORCL 2.02%) and HP (HPQ -0.46%) are often considered reliable blue-chip tech stocks that are owned for stability and income instead of aggressive growth. I compared these two stocks last June and declared that HP's simpler business model, lower valuation, and higher dividend made it the better buy.
But since I made that call, Oracle's stock has risen 57% as HP's stock declined 16%. Let's see why Oracle outperformed HP by such a wide margin -- and whether it is likely to remain the better big tech investment over the next 12 months.
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HP is still struggling with a sinking PC market
HP is one of the world's top producers of PCs and printers. During the pandemic, its sales of consumer PCs surged as the lockdowns drove more people to upgrade their PCs for online classes, remote work, and high-end gaming. Its sales of consumer printers also rose as consumers did more do-it-yourself printing projects at home. Those higher sales of consumer devices offset slower sales of its commercial PCs and printers.
As the pandemic ebbed, HP's sales of consumer devices declined sharply because shoppers didn't need to upgrade their new devices. HP initially expected the post-pandemic growth of its commercial business to offset that slowdown, but inflation, soaring interest rates, and macroeconomic headwinds abruptly throttled that recovery.
That's why HP's revenue fell 1% in fiscal 2022 (which ended last October) even as its adjusted EPS grew a mere 8%. For fiscal 2023, analysts expect its revenue and adjusted EPS to decline 15% and 19%, respectively, as that downturn deepens.
As HP's revenue growth stalls out, it's cutting costs and streamlining its business through the core tenets of its "Future Ready Transformation Plan" -- which include laying off 7% to 10% of its workforce by the end of fiscal 2025, reducing its number of unique PC models to simplify its business, launching new subscription services, and developing new products for its higher-growth hybrid work, gaming, industrial graphics, and 3D printing markets.
HP's stock looks cheap at eight times forward earnings and it pays a hefty forward dividend yield of 3.6%, but the bulls probably won't come back until the macro environment improves and its revenue consistently grows again.
Oracle faces tougher macro headwinds
Oracle is the world's largest database software company. Over the past few years, it transformed a large portion of its on-site software into cloud-based services, expanded its own Oracle Cloud Infrastructure (OCI) platform, and rolled out more enterprise resource planning (ERP) services. That transformation prevented it from suffering the same fate as other aging tech giants like IBM.
Oracle's revenue rose 5% in fiscal 2022 (which ended in May 2022) and 7% on an organic basis (excluding its acquisition of the healthcare IT giant Cerner last year) in fiscal 2023. Most of that acceleration was driven by its NetSuite ERP and OCI platforms, which were well-insulated from both the pandemic and inflationary headwinds. The robust growth of those core cloud services also largely offset the slower growth of its on-premise software, hardware, license, and support businesses.
Oracle expects the growth of its cloud services to cool off this year as its cloud license, on-premise, and hardware revenues keep declining. Analysts still expect its overall revenue and adjusted EPS to rise 8% and 9%, respectively, for the full year, but its recent earnings miss and lower-than-expected guidance for the second quarter could force those estimates to be reduced.
But based on those estimates, Oracle trades at 20 times forward earnings and pays a forward yield of 1.3%. It isn't a screaming bargain yet, but its steady growth could still make it an attractive safe haven stock in this turbulent market.
The better buy: Oracle
When I compared HP to Oracle last year, I underestimated the depth of the PC market's post-pandemic slowdown and overestimated the macro headwinds for Oracle's cloud-based services. HP still initially seems like the cheaper dividend play, but it will continue to trade at that discount until the PC market finally recovers. Since that recovery should take at least a few more quarters, Oracle's stock will likely continue to outperform HP's over the next 12 months.
