Many investors might think of Oracle (ORCL 2.02%), the world's largest database software provider, as a blue chip tech stock that is owned for stability instead of growth. That notion seems valid because its core market is heavily commoditized.
However, Oracle actually evolved into a cloud software company over the past few years as it transformed its on-premise software into cloud-based services. It also expanded its ecosystem with new enterprise resource planning (ERP) services.
Image source: Getty Images.
To accelerate that evolution, Oracle acquired the cloud software company NetSuite for $9.3 billion on Nov. 7, 2016. If you had invested $3,000 in Oracle on that fateful day and reinvested your dividends, your investment would be worth about $9,400 today. That same investment in an S&P 500 index fund would only be worth around $6,900. Let's review the three main reasons Oracle outperformed the market over the past seven years.
Its growth accelerated as it expanded its cloud business
From fiscal 2016 to fiscal 2023 (which ended on May 31, 2023), Oracle's revenue grew at a compound annual growth rate (CAGR) of 4%. Those numbers might seem unimpressive, but it experienced a growth spurt over the past three years:
Source: YCharts
Between fiscal 2020 and fiscal 2023, Oracle's annual revenue actually grew at a CAGR of 8.5% as it expanded its cloud-based database, ERP, and infrastructure services. It also made several major acquisitions -- including the healthcare IT giant Cerner for $28 billion last June -- to strengthen and diversify its cloud ecosystem.
Oracle generated nearly 71% of its revenue from its cloud-based services and license support businesses in fiscal 2023, up from 66% of its revenue in fiscal 2018 (the first full year it disclosed those figures separately).
Within that total, Oracle's software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) segments -- which it collectively refers to as its "total cloud services" -- are growing at a faster clip than its cloud licensing and support divisions. Its total cloud services revenue grew 50% (29% excluding Cerner) in fiscal 2023 and accounted for 32% of its top line. That figure rose another 29% year over year (including Cerner) in the first quarter of fiscal 2024.
Simply put, Oracle's cloud-based transformation prevented it from being left behind the tech curve and enabled it to maintain its leadership position in the database market. It also enabled it to challenge SAP, Microsoft, and other enterprise software giants in the ERP market with its NetSuite and Fusion ERP services.
It repatriated a lot of cash and bought back a lot of shares
From fiscal 2016 to fiscal 2023, Oracle's adjusted net income only grew at a CAGR of 3%, but its adjusted earnings per share (EPS) rose at a CAGR of 10%. Its EPS grew faster than its net income because it bought back a third of its shares over the past seven years.
The Tax Cuts and Jobs Act of 2017 allowed big multinational companies to repatriate their overseas cash to the U.S. without paying additional taxes. That change prompted Oracle to repatriate billions of dollars, and it spent a large portion of that cash on big buybacks.
Oracle only bought back $1.3 billion in shares in fiscal 2023, compared to $16.2 billion in fiscal 2022 and $20.9 billion in fiscal 2021. But taking a conservative approach to buybacks in this choppy market isn't all that surprising, especially as rising interest rates drive more investors toward companies with healthier cash flows.
It benefited from the flight to safe haven stocks
The market's shift toward more conservative investments lit a fire under Oracle's stock because it checked all the right boxes for a safe haven stock. It's growing at a steady rate, it's firmly profitable, and it was sitting on $11.6 billion in cash and equivalents at the end of its latest quarter. It also still looks reasonably valued at 20 times forward earnings.
Will Oracle continue to outperform the market?
Oracle, like most of its cloud-based peers, faces challenging macro headwinds this year as companies rein in their software spending. But over the long term, I believe Oracle will continue to grow as its cloud and ERP markets expand. It might not generate jaw-dropping gains, but it has a clear path toward outperforming the S&P 500 as well as some of its big tech peers.
