Oracle: The Drop Is a Buying Opportunity

Since releasing its fourth-quarter results in June, Oracle (ORCL) shares have dropped to the tune of 19%. Given the company's weak performance last quarter, this does not seem surprising. Oracle had reported fourth-quarter revenue of $10.7 billion, a decline of 5% from the same period last year, primarily due to the strengthening U.S. dollar.

In addition, Oracle had reported fourth quarter non-GAAP net income of $3.5 billion, a decline of 14% over the same period last year. The technology major saw a drop in its top and bottom lines due to the unfavorable impact of the strengthening U.S. dollar, but reported a slight improvement in constant currency terms.

The weakness won't last for long

Oracle is seeing strong growth in its PaaS and SaaS segments.

The company sold solutions worth $426 million in these two segments, representing a year-over-year bookings growth rate of more than 200%. Oracle's SaaS and PaaS top line growth rates are approximately 60% in constant currency terms, with the company's multi-billion dollar cloud business getting bigger. Contrastingly, Oracle's core cloud competitors are forecasting their revenue growths in the 44% and 22% range.

Moreover, Oracle estimates to book SaaS and PaaS business for this fiscal year valued in the $1.5 to $2 billion range, thus exceeding rival Salesforce.com's (CRM) target. Oracle currently plans to deliver SaaS and PaaS revenue growth rate of approximately 60% on a constant currency basis. However, Salesforce.com is expected to deliver a growth rate of nearly 20%, thus making Oracle a leading enterprise cloud company.

As a result of these growth areas, Oracle's billings increased from $468 million to $834 million year-over-year. Hence, the technology major recorded a growth rate of over 70% in U.S. dollar terms, which is significantly higher than key counterparts such as Salesforce, which posted 21% billings growth and Workday, which had posted 31% billings growth for the latest declared quarter.

In addition, Oracle's overall hardware business, which includes hardware support, expanded 5% last quarter with hardware support revenue reported at $590 million. Also, hardware system product revenue was recorded at $818 million last quarter. In addition, engineered systems are delivering significant double-digit bookings growth, with Oracle strategically capturing the market share of HP and IBM.

Shareholder friendly

Oracle is a shareholder-friendly company. Last quarter, Oracle bought back 4.6 million shares valued at $2 billion, in line with its commitment to enhance shareholders' wealth. Over the past year, Oracle has bought back over 193 million shares valued at $8.1 billion, and offered $2.3 billion worth of dividends, which is 80% of its total free cash flows.

Thus, Oracle is focused on returning a majority of the invested capital back to its shareholders through strategic share buybacks. Going forward, Oracle will be able to sustain its strong capital return program as the company focuses on growth segments in the cloud and takes market share away from its rivals.

Conclusion

In my opinion, Oracle's drop after its latest quarterly results is an opportunity to buy more stock. This is because the company has an attractive valuation as well, with a trailing P/E ratio of 16.4 and a forward P/E ratio of 12.3. The company also has a strong profit margin of 26% and an impressive balance sheet. Oracle's total cash position stands at $54.37 billion as against a comparatively smaller debt of $41.96 billion.

This means that the company is well-placed to make investments in growth areas going forward, as a result of which it will be able to sustain its growth momentum going forward. Hence, the drop in Oracle shares is a buying opportunity that investors shouldn't miss.

Published on Sep 3, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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