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Oracle Continues to Expand Cloud Service, Margin Woes Remain


On Dec 6, we issued an updated research report on Oracle Corp. ORCL, a Redwood City, CA-based enterprise-grade database, middleware and application software provider.

Oracle, which enjoys a dominant position in the enterprise software and database management system (DBMS) software market, is gaining ground in the cloud sector as well.

However, the business model transition will adversely affect the company in the near term as revenues from SaaS are recognized later against upfront revenues from legacy on-premise licensing business. Additionally, increased spending for the transition negatively impacts margins.

Oracle stock has gained 25.9% year to date, underperforming the 31.8% rally of the industry it belongs to.

Key Factors

Oracle’s next-generation autonomous database, which is supported by machine learning, is a key catalyst. Among infrastructure, DBMS is expected to record strong growth driven by Big Data and digitalization initiatives. We believe that Oracle’s leading position in the DBMS software market will make it the primary beneficiary of this increased spending.

Moreover, Oracle is gaining from a significant momentum of its software-as-a-service (SaaS) offerings. It is winning market share against salesforce.com CRM and Workday WDAY, which is a significant growth driver. We believe the company’s growing cloud market share will continue to drive top-line growth in the foreseeable future.

Oracle Corporation Revenue (TTM)

Oracle Corporation Revenue (TTM) | Oracle Corporation Quote

Both its software-as-a-service (SaaS) and platform-as-a-service (PaaS) products are anticipated to witness robust growth over the next few years as enterprises increasingly transition to the cloud. According to an IDC market report, SaaS will remain the dominant cloud computing type, capturing nearly two thirds of all public cloud spending in 2017 and roughly 60% in 2020. To tap this massive opportunity, Oracle introduced a number of Cloud Platform services in the last few quarters that will not only help personalize SaaS applications, which are currently in demand but also support easy migration of on-premise applications to Oracle Cloud.

However, the late revenue recognition from a SaaS based business model will be a drag on the top line. Moreover, additional spending on PaaS and IaaS will keep margins under pressure in the near term. Furthermore, intensifying competition in the cloud business from Microsoft’s MSFT Azure and Amazon Web Services (AWS) is a concern for the company.

Zacks Rank

Oracle has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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