22 BARRON’S February 22, 2021
A
new giant is
starting to flex
its muscles in
cloud comput-
ing. And it isn’t
some upstart—
it’s a company
that you think
you know, hiding in plain sight.
We’re talking aboutOracle(ticker:
ORCL)—yes, Oracle—the software
powerhouse co-founded in 1977 by
Larry Ellison, Silicon Valley’s evil
genius. He built Oracle in his own
image, with an aggressive sales team
and a ferocious competitive style. The
approach worked well for a long time,
until Oracle got mired in a rut.
That is about to change.
Like another legacy tech giant,
Microsoft(MSFT), which was in a
similar position about a decade ago,
Oracle has been able to reinvent itself
for the cloud-computing era. It is bet-
ting bigger on a cloud-only version of
its core database software business.
Already, it has had strong revenue
growth in cloud enterprise applica-
tions. The juiciest opportunity is
Oracle’s public cloud offering, which
is taking onAmazon.com(AMZN),
Microsoft, andAlphabet(GOOGL)
in a market arguably worth trillions
of dollars.
The public cloud—which is what
most people mean when they talk
about “cloud computing”—turns com-
puting into a utility, like water or elec-
tricity. Instead of building your own
data centers and buying and assem-
bling servers, storage, and networking
gear, you farm it all out to the public
cloud players. If you need more capac-
ity, you buy more. If you need less,
you buy less. It’s about getting what
you need quickly, rather than invest-
ing in the hardware, real estate, and
infrastructure of data centers. Slowly
but surely, every company is shifting
at least some computing to cloud ser-
vices, and the trend is accelerating.
On a recent earnings conference
call, CEO Safra Catz said that Oracle
Cloud Infrastructure revenue was up
139% for the quarter. The total, Ellison
added, would have been higher had
Oracle not simply run out of capacity.
Alas, Oracle doesn’t break out OCI
sales, and cloud comps can be messy.
(See accompanying article.)
Catz says that hers is the only tech
company that has both a global cloud
and full set of enterprise applications.
“Our customers benefit because our
applications make our infrastructure
better and our infrastructure makes
our applications better,” she told
Barron’svia email. “Our expertise
has always been running the hardest,
most complex jobs....Customers are
not willing to compromise on speed
or security, and OCI is in a class of its
own on both.”
Clay Magouryk, executive vice
president for Oracle Cloud, says,
“There’s no way that in the next
two or three years, Oracle will
be viewed as anything but a cloud
company.”
If Oracle is a cloud play, it is cer-
tainly not being valued as one. The
stock trades for 14 times consensus
estimates for the May 2021 fiscal year,
or 13 times if you use the fiscal 2022
consensus. That compares with the
S&P 500 index at 23 times this year
and 20 times next year. Were inves-
tors to use the cloud-based data
warehousing companySnowflake
(SNOW) as a benchmark, Oracle
would be valued at more than $3 tril-
lion, up from its current $183 billion.
“The market assumes Oracle is not
going to grow at all,” says John Di-
Fucci, a former Wall Street tech ana-
lyst who now manages money for the
London-based Artemis Funds. “That’s
what the valuation is telling you.” The
market is wrong, he adds.
Once Wall Street begins to under-
stand Oracle’s cloud transformation—
and as that change gradually shows
up in the numbers—the upside is
considerable.
The timing for a rediscovery of
Oracle shares, trading at a recent $62,
could not be better. As interest rates
rise, concerns increase about the rich
valuations of many far pricier cloud
bets. Credit Suisse analyst Brad
Zelnick thinks that Oracle’s revenues
are poised to accelerate “just as inves-
tors increasingly look for value-
oriented exposure to the sector.”
Monness Crespi Hardt’s Brian
White agrees, writing last year that
“Oracle offers investors a high-quality
value play with the opportunity to
capitalize on the company’s cloud
transformation and increasingly at-
tractive business model.” He has a
price target of $82 on the shares, while
Zelnick has $75. Given Oracle’s poten-
tial, those prices could be too low.
T
he Oracle story is simpler than
you might think. The business
has two primary parts: soft-
ware for storing information
(databases), and software to collect,
process, and act on that information
(enterprise applications).
Those applications have jargony
names, like “enterprise resource plan-
ning” (ERP, for managing finances),
“customer relationship management”
(CRM, for managing sales), and “hu-
man capital management” (HCM, for
managing staff), but the larger point is
that they sell foundational software to
run big companies. Oracle sells noth-
ing to consumers, and never has.
Oracle also has two of the tech sec-
tor’s more unusual leaders—one who
might talk too much, and the other,
too little. Ellison remains chairman
and chief technology officer, and still
owns close to 40% of the company.
He will be 77 in August and has the
energy of someone 30 years younger.
He remains Oracle’s biggest cheer-
leader, one who gleefully and repeat-
edly stomps on his rivals’ toes. He’s a
hoot, and is as engaged in Oracle as
he ever has been.
CEO Catz is an Israeli-born, Massa-
chusetts-raised, University of Penn-
sylvania–educated lawyer. She started
her career in investment banking be-
fore joining Oracle in 1999. After
stretches as president and chief finan-
Well-Timed
Transition
Credit Suisse
analyst Brad
Zelnick thinks
Oracle’s revenue
is poised to
accelerate “just
as investors
increasingly
look for value-
oriented
exposure to the
[cloud] sector.”
$3Trillion
What Oracle’s
stock market
capitalization
would be—
instead of its
current $183
billion—if it were
valued like data
warehouser
Snowflake.
CHEAPBYANYMEASURE
No matter how you cut it, Oracle looks like a bargain compared with its higher-priced peers.
Recent 2021E 2021E 2021E 2021E Market
Company / Ticker Price Sales (bil) EPS Price/Sales P/E Value (bil)
Oracle/ ORCL $62.09 $41.1 $4.68 4.5 13.3 $183
Microsoft/ MSFT 244.20 182.3 8.07 10.1 30.2 1,842
SAP/ SAP 126.31 32.9 5.90 4.7 21.4 148
Salesforce.com/ CRM 247.66 25.4 3.49 8.9 70.9 227
Snowflake/ SNOW 288.78 1.1 -0.85 74.6 NM 82
Workday/ WDAY 271.05 5.0 2.89 13.0 93.7 65
IBM/ IBM 119.97 74.3 11.14 1.4 10.8 107
NM=not meaningful. E=estimated. *For fiscal years ending May ’22 for ORCL; June ’22 for MSFT; Jan ’22 for CRM, SNOW, and WDAY. Source: FactSet“Our expertise has always been running
the hardest, most complex jobs,”
says Oracle CEO Safra Catz, shown at right.