Oracle's (ORCL 2.02%) stock sank 9% during after-hours trading on Dec. 11 after the tech giant posted its latest earnings report. For the second quarter of fiscal 2024, which ended on Nov. 30, its revenue rose 5% year over year to $12.9 billion but missed analysts' estimates by $110 million. Its adjusted earnings per share (EPS) grew 11% to $1.34 and exceeded expectations by a penny.

Those headline numbers weren't terrible, but investors had expected better results to justify the stock's year-to-date rally of about 40% prior to its earnings report. Let's review the three reasons to buy Oracle's stock -- as well as three reasons to sell it -- to see if it's still a worthwhile investment after its recent post-earnings pullback.

A cloud with lines connecting points inside it.

Image source: Getty Images.

A recap of Oracle's growth strategies

Oracle is the world's largest database software company. Over the past decade, it transformed a lot of its on-site software into cloud-based services to keep pace with the evolving market. To accelerate that transformation, it acquired a long list of companies -- including the cloud giant NetSuite in 2016 and the healthcare IT leader Cerner in 2022.

Most of Oracle's recent growth was driven by the expansion of its cloud business and enterprise resource planning (ERP) services. The company's stable profitability and repatriation of its overseas cash also generated plenty of cash for its buybacks and dividends. That's how it bought back nearly 40% of its outstanding shares over the past decade.

The three reasons to buy Oracle

Oracle's growth is cooling off as the macro headwinds drive companies to rein in their spending, but it has three notable strengths:

  1. Its margins are expanding.
  2. Its free cash flow (FCF) is growing.
  3. It's returning a lot of its cash to its investors.

Oracle's adjusted operating margin grew two percentage points year over year and sequentially to 43% in the second quarter. For the first half of the year, its adjusted operating margin also improved two percentage points to 42%. It attributes that expansion to the improved scale of its cloud business, its focus on growing Cerner's profits, and other cost-cutting measures.

As a result, its trailing 12-month FCF grew 20% year over year to $10.1 billion by the end of Q2. That healthy FCF growth enabled it to buy back $600 million in shares in the first half of the year while paying out $2.2 billion in dividends.

The three reasons to sell Oracle

However, the bears will point out:

  1. Oracle's cloud growth is decelerating;
  2. Its dividend is too low.
  3. Its stock isn't a bargain relative to other blue-chip tech stocks.

Oracle's total cloud revenue (including Cerner) grew 24% year over year to $4.8 billion, or 37% of its top line, in Q2. Within that total, its infrastructure-as-a-service (IaaS) revenue increased 50% as its software-as-a-service (SaaS) revenue rose 14%. But all three of those growth rates cooled from the first quarter when its total cloud revenue grew 29%, its IaaS revenue jumped 64%, and its SaaS revenue rose 17%.

That deceleration is worrisome when we consider that Microsoft's cloud growth accelerated in its latest quarter, while Amazon's cloud growth held steady. Oracle's recent decision to tether its own databases to Microsoft's Azure instead of locking them into its own Oracle Cloud Infrastructure (OCI) platform also suggests it's falling behind Microsoft, Amazon, and other tech giants in the crowded cloud infrastructure market.

Oracle has spent a lot more cash on its dividends than on its buybacks this year, but its paltry forward yield of 1.4% won't attract any serious income investors as long as CDs and Treasury bonds are paying yields of over 5%. Meanwhile, its decision to spend less cash on buybacks this year (compared to its $16.2 billion in buybacks in fiscal 2022 and $1.3 billion in buybacks in fiscal 2023) suggests the company doesn't think its shares are extremely undervalued.

Oracle's forward multiple of 21 might seem reasonable, but other blue chip tech stocks like Cisco Systems and HP trade at 13 and 9 times forward earnings, respectively. Cisco and HP also pay higher dividends.

Which argument makes more sense?

Oracle is still a decent investment for long-term investors, but it's easy to find higher-growth cloud stocks or cheaper dividend-paying tech stocks. Since it doesn't fit neatly into either category, I believe its stock will trade sideways and underperform the market until its cloud growth finally stabilizes or accelerates. So for now, I believe the bearish bullet points for Oracle still make a lot more sense than the bullish ones.