(08/05/14) Oracle: Value in the Cloud

Companies increasingly prefer to subscribe to software accessed over the Web—via cloud software—rather than buy the software and pay monthly maintenance fees, explains Philip Springer in Personal Finance.

Oracle (ORCL), a leading global provider of database, middleware, and applications software, concedes it was too slow to recognize and adapt to the cloud.

For years, pundits often have claimed that Oracle is all washed up, left behind by smaller, more nimble companies amid rapid technological change. We disagree.

The chorus rose again after the company’s latest—admittedly disappointing—earnings report.

Nevertheless, CEO Larry Ellison said, “Oracle is focused like a laser on one goal over the next few years: Becoming the No. 1 company in cloud computing’s two most profitable segments.” He was referring to software-as-a-service, or SaaS, and platform-as-a-service, or PaaS.

In addition, Oracle’s cloud-based products run on the company’s own database, the world’s most popular. Oracle says it has a 50% market share of the database market, and that customers could benefit from a complete package offering of cloud applications and database. Here are five keys to know about Oracle:

Bumpy earnings-report transitions occur periodically. The last one happened in June 2013, when quarterly results fell short and the stock dropped 10%. But the shares then jumped 42% over the next year.

Oracle continues to grow by every metric. The following have increased for at least ten years in a row: revenues, operating income, net income, EPS, operating cash flow, and free cash flow. Gross and operating profit margins have dipped periodically, but have since recovered to new highs.

Shareholder returns also are increasing. In recent years, the company has accelerated its stock-buyback program, reducing the number of shares outstanding by 10% since 2011. The company also started to pay a dividend in 2009. Current yield: 1.2%.

Oracle grows organically and through acquisitions. Last month, it announced its purchase of Micros Systems, Inc. (MCRS), Oracle’s biggest acquisition since 2010. The deal is valued at $4.6 billion. Micros Systems sells software and services used by hotels, restaurants, and retailers. Micros has worked with Oracle for some 15 years.

The stock still offers good value. Oracle currently is expected to grow its EPS 9%-to-10% annually over the next two years. The shares trade at only 13 times EPS, the projected number for fiscal 2015 (through May). Oracle has a $180 billion market capitalization, and it holds $32 billion in cash.

That Oracle offers good value is the most important point. Investors continue to expect less from Oracle, and to value the company accordingly. That’s their mistake: The shares have tripled since the March 2009 bear-market bottom, outpacing the Standard & Poor’s 500. Buy Oracle up to $40 for conservative long-term growth.