3 Things About Oracle That Smart Investors Know

Oracle (ORCL -0.61%) is often considered a bellwether of the tech sector. It's the world's largest database software company, its cloud-based transformation enabled it to keep pace with most of its enterprise software peers, and it has bought back nearly 40% of its shares over the past decade to consistently grow its earnings per share.

Oracle also generated a total return of 280% over the past 10 years, compared to the S&P 500's total of just over 200%. Most investors are likely familiar with that success story, which counters the notion that it's a slow-growth tech giant. So today, I'll focus on three other aspects of its business that smart investors should also know about.

Image source: Getty Images.

1. Oracle is still an underdog in the cloud infrastructure race

In its latest quarter, Oracle generated $4.6 billion in revenue, or 37% of its top line, from its "total cloud services" segment. That segment is split into two divisions: software as a service (SaaS), which includes its cloud-based database software and enterprise resource planning (ERP) services; and infrastructure as a service (IaaS), which provides cloud hosting through its Oracle Cloud Infrastructure (OCI) platform.

During the first quarter of fiscal 2024, Oracle's SaaS revenue rose 17% year over year to $3.1 billion in constant currency terms as its IaaS revenue grew 64% to $1.5 billion. Over the past year, its SaaS growth decelerated as it faced tougher headwinds and lapped its acquisition of the healthcare IT giant Cerner. However, its IaaS segment continued to grow much faster as OCI gained more customers.

Data source: Oracle. YOY = Year over year. Constant currency terms.

OCI is also growing faster than larger cloud infrastructure platforms like Amazon Web Services (AWS), Microsoft (MSFT -1.00%) Azure, and Alphabet's Google Cloud Platform (GCP).

Yet OCI is still tiny compared to those market leaders. According to Synergy Research, Oracle controlled only 2% of the cloud infrastructure market in the second quarter of 2023, putting it in seventh place behind AWS (32%), Azure (22%), GCP (11%), Alibaba (4%), Salesforce (3%), and IBM (3%).

In short, OCI's growth is encouraging, but investors shouldn't overestimate its ability to challenge Amazon, Microsoft, and Google in the cutthroat cloud infrastructure market.

2. Oracle recently partnered with Microsoft

Microsoft is one of Oracle's top IaaS competitors, and its SQL Server platform also competes against Oracle in the database software market. That's why it was surprising when Oracle recently announced a major new partnership with Microsoft.

Through that new Database@Azure partnership, Oracle will allow its clients to run its database services on Azure's cloud infrastructure platform. Microsoft claims the partnership will provide Oracle's database users with the "security, flexibility, and best-in-class services of Microsoft Azure, including best-in-class AI services like Azure OpenAI." Oracle notably hasn't signed any similar deals with AWS, GCP, or other hyperscale cloud providers.

That deal could make it easier for Oracle's customers to migrate their on-premise databases to the cloud without locking themselves into OCI. But it also implies that Oracle isn't confident enough in OCI's ability to support the growth of its core database business, and that Microsoft realizes its SQL Server probably won't ever overtake Oracle in the database market.

That seems like a win-win situation for both companies, but it's arguably a more meaningful victory for Microsoft because it locks Oracle's customers out of AWS and GCP. As a result, the only options for Oracle's customers migrating to the cloud will be OCI or Azure -- and the latter's scale and AI tools might make it the more appealing choice.

3. Oracle's insiders are still net sellers

Oracle's stock price is up more than 30% this year, yet its stock still looks reasonably valued at 19 times forward earnings and pays a forward dividend yield of 1.5%. Only one of the 34 analysts who cover the stock rates it as a sell.

Yet over the past 12 months, Oracle's insiders have sold 13.7 million shares but only bought about 14,000 shares. Over the past three months, they sold nearly 132,000 shares but didn't pick up a single share.

That chilly insider sentiment suggests its near-term upside could be limited as the growth of its SaaS segment cools off and its on-premise businesses struggle with slower enterprise spending in a choppy macro environment.

Will these three things affect Oracle's future?

Oracle's cloud infrastructure growth is encouraging, but its partnership with Microsoft suggests OCI's growth potential could ultimately be limited. The relentless insider selling also suggests it isn't the best time to back up the truck.

I believe Oracle is a stable blue chip tech stock, but investors should carefully consider these issues -- along with its other challenges in the cloud sector -- before starting a new position in this volatile market.