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Oracle Corporation Takes Aim at the Cloud

By Tim Brugger - Jan 9, 2016 at 4:04PM

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The onetime hardware and traditional software-centric enterprise king is getting serious about its cloud ambitions.

Based on its meandering stock price since announcing fiscal 2016 Q2 earnings on Dec. 16, it appears investors were less than impressed with Oracle's (ORCL -0.30%) financial results. It's not difficult to see why Oracle's share price has been under pressure of late: A 6% drop in total revenue to $9 billion last quarter, down from last year's $9.6 billion, will do that.

For some, that may be the end of the Oracle story. But there's a bit more to consider as Oracle, like so many others in the ever-changing world of technology, continues its transition to new markets such as the cloud. Estimates vary, of course, but the overriding theme is clear: The market for cloud-based services, particularly software as a service (SaaS) delivered on the cloud, is expected to explode in the coming years. One estimate from Gartner suggests that the enterprise software market will grow to more than $200 billion in three short years, driven by cloud-related sales.

What does that have to do with Oracle? A lot more than some investors and industry pundits seem to think, and Oracle continues to take steps to become an even bigger player in one of the industry's fastest-growing markets.

Slow, but steady
Like most of its peers, Oracle is looking up at Microsoft (MSFT 0.44%) in making its mark in the cloud wars. With an annual run rate of over $8.2 billion last quarter, Microsoft CEO Satya Nadella's relatively early transition to a focus on delivering cloud-based SaaS solutions is paying off handsomely, and investors are slowly getting on board, as evidenced by the stock's nearly 16% jump in 2015.

That said, there are those who still view Microsoft, and Oracle for that matter, as old-school enterprise hardware and software providers in a world that's quickly disappearing. And therein lies the opportunity for long-term-growth investors. Like Microsoft, and even IBM (IBM 0.27%), which has invested billions of dollars in the past year to jump-start its own cloud efforts, Oracle is quietly becoming a legitimate player in the fast-growing market.

Somewhat overlooked following Oracle's most recent earnings report was its growth in both cloud SaaS and infrastructure-as-a-service sales. After factoring in the impact of currency, Oracle enjoyed a whopping 31% jump in cloud sales last quarter, to $649 million, the majority of which was SaaS revenue. Just as importantly, cloud-related sales continue to make up a larger piece of Oracle's total revenue pie.

No, Oracle isn't at the $8.2 billion-plus annual run rate of Microsoft, or even the $4.5 billion in revenue IBM is generating from its cloud efforts, but it's working to change that.

Baby steps
Oracle recently announced that it has acquired cloud development operations platform provider StackEngine for an undisclosed amount. The deal for StackEngine in and of itself is hardly a game-changer, but it demonstrates that Oracle is focused on enhancing its suite of cloud solutions, boosting what is already a fast-growing piece of its business.

Along those same lines, Oracle has also said it plans to build a 560,000-square-foot office in Austin, Texas, specifically for its cloud operations and will grow the workforce "by more than 50%" over the next few years. The deal for StackEngine and Oracle's commitment to building a separate, cloud-centric hub in Austin are both confirmation it's not content playing second fiddle to the likes of Microsoft and IBM in the cloud world. And that will ultimately translate to an opportunity for long-term investors.

Don't be surprised to see ongoing pressure on Oracle's stock price during its transition: Both Microsoft and IBM can attest to the short-term mind-set of many an investor and industry pundit. But as the recent moves from Oracle indicate, its sights are set on bigger things than "traditional" hardware and software. And given time, Oracle's focus on the cloud should begin to pay off handsomely.

 

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. The Motley Fool recommends Gartner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$77.12 (-0.30%) $0.23
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
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Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
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Gartner, Inc. Stock Quote
Gartner, Inc.
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