Barron's - USA (2021-02-22)

(Antfer) #1

24 BARRON’S February 22, 2021


cial officer, Catz in 2014 was named

co-CEO with former Hewlett-Packard

chief Mark Hurd; she has been sole

CEO since Hurd’s death in October

2019. Catz is brilliant, widely respected

on the Street, and one of the most pow-

erful women in tech. Publicity shy, she

rarely grants interviews.

Oracle’s financial story has been a

snoozer for a long, long time. In fiscal

2011, it had sales of $35.9 billion. The

current 2021 Wall Street consensus

estimate is $40 billion. That’s 11%

cumulative growth over 10 years,

well below the cumulative inflation

rate. Microsoft’s sales have grown

134% over the same span, while

those atSalesforce.com(CRM),

built by former Oracle executive

Marc Benioff, are up 1,200%.

Under the surface, however, change

has been under way for years at Oracle.

“Enterprise software is complex,” says

Manish Gupta, a portfolio manager at

First Eagle Investment Management.

“They’ve had to rebuild to architect for

the future. It has taken them time. But

they have made the turn.” Oracle is the

largest position in several funds he

co-manages.

Dan Niles, founder and portfolio

manager for the tech-focused Satori

hedge fund, says Oracle is now his larg-

est position. Niles, who says he has

been short Oracle more often than long

over the past 10 years, thinks that Ora-

cle might have reached the kind of in-

flection point that Microsoft hit in

2014, when it chose Satya Nadella as

CEO, and went all-in on the cloud.

“Oracle stock has not mattered for

the last few years,” Niles says. “It’s fi-

nally starting to matter.”

The Microsoft example is instruc-

tive. It isn’t just that Microsoft commit-

ted to the cloud; the company also

changed its image. Perceptions matter,

and investors are searching intensely

for cloud stories. ConsiderTeradata

(TDC), a slow-growth 40-year-old data

warehousing firm. In reporting finan-

cial results a few weeks ago, it disclosed

triple-digit growth for its nascent cloud

business—and its stock doubled in

three days.

There are three major elements

of Oracle’s shift to the cloud. One is

database software, where its main

innovation is Autonomous Database,

or ADB, a cloud-only product that

uses machine learning and artificial

intelligence to automate security,

backups, patching, and other tasks

that used to require an army of

administrators. As it shifts business

to the cloud, Oracle smooths out rev-

enues, while picking up extra cash

for server licenses and other ancil-

lary services. Over time, a switch to

the cloud will help grow revenue,

which was up a modest 3% in the

latest quarter, to $4.2 billion.

KeyBanc analyst Michael Turits

thinks the database business can

accelerate growth to close to 8%. One

key driver is Cloud@Customer, Ora-

cle’s version of a private cloud.

Launched last year, Cloud@Customer

mimics the structure of a public

cloud, but operates inside corporate

data centers. Oracle runs the hard-

ware and software, collects revenue

on a subscription basis and provides

performance guarantees, but the

servers sit on the customer site. Pre-

viously, the only way to access Au-

tonomous Database was to run it on

the Oracle Cloud—not an option for

companies that need to keep data

inside the firewall, like banks and

federal agencies. With Cloud@Cus-

tomer, Oracle sharply expands the

potential market for ADB.

The second path involves enter-

prise applications, where revenue

was up 5% in the November quarter,

to $2.9 billion—and growth should

accelerate from here. The current

total includes big growth in Oracle’s

three most important cloud applica-

tions, Fusion ERP (financials for

large companies), up 33%; Fusion

HCM (HR software for larger firms),

up 24%; and NetSuite ERP (finan-

cials for smaller companies), up 20%.

Annoyingly, Oracle does not break

out revenue for any of those—and

legacy versions are shrinking. But by

some estimates, less than 10% of the

enterprise application market has

moved to the cloud—Oracle’s own

installed base offers the company a

rich target.

Oracle sees potential market-share

gains, particularly in ERP, from rival

SAP(SAP). Ellison smells blood. At

an event for entrepreneurs at his

house in San Francisco’s Pacific

Heights neighborhood in 2019, which

Barron’sattended, Ellison conceded

that SAP has been the ERP software

leader in the data-center era, but he

argued that, with the arrival of the

cloud, Oracle would leapfrog its rival.

“There is nothing they can do to stop

us from getting virtually all of their

customers,” he boasted at the time.

On Oracle’s most recent earnings

call, Ellison repeated his claim. “In

the coming months, our cloud ERP

market leadership will become even

more obvious when we announce

that several major-league-scale SAP

ERP customers are leaving SAP and

moving to our Fusion ERP cloud,”

he said. Ellison adds that Oracle has

more than 30,000 customers in the

cloud for its ERP software. “Who’s

second?” he asks. “Workday

[WDAY] with a few hundred? I

mean, it isn’t close.”

In response, SAP says, “We have

done the research and cannot find

examples to support his [Ellison’s]

claims that customers are moving

from SAP ERP to Oracle. Our prior-

ity is on driving our customers’ suc-

cess, not putting them in the middle

of a battle with our competitor.”

Then there is the public cloud.

While still small—analysts think its

business has annual revenue of about

Techdom’s


Odd Couple


Chairman Larry

Ellison is out-

spoken. CEO

Safra Catz

is quiet and

publicity shy.

$40Billion


Oracle’s

estimated

sales this year,

representing

only 11% cumula-

tive growth over

fiscal 2011’s

ORACLE HAS BEEN BUYING ITSELF


While Oracle hasn’t show much revenue growth over the past decade, it generates lots of cash, which has allowed the company to buy back 40% of its stock over the


past decade, driving steady profit growth.


Fiscal Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E


P/E 13.5 15.4 10.8 12.6 14.6 15.7 15.4 16.6 15 14.4 14 14.4 13.3

Sales(bil) 27 35.9 37.1 37.3 38.3 38.3 37.1 37.9 39.9 39.5 39.1 40 41.1

Sales Growth – 32.96% 3.34 0.54 2.68 0.00 -3.13 2.16 5.28 -1.00 -1.01 2.30 2.75

Net Income(bil) $8.5 8.5 12.5 13 13.2 12.5 11.2 11.6 13.2 13.1 12.7 13.2 13.4

EPS* $1.67 2.22 2.46 2.68 2.87 2.77 2.61 2.74 3.12 3.52 3.85 4.36 4.68

EPS Growth – 32.93% 10.81 8.94 7.09 -3.48 -5.78 4.98 13.87 12.82 9.38 13.25 7.34

Diluted Shares 5073 5128 5095 4844 4604 4503 4305 4217 4238 3732 3046** – –

E=estimate. May fiscal year end. *Non-GAAP ex. stock option expense. **As of Nov. 2020. Source: FactSet


“There is nothing [SAP] can do to


stop us from getting virtually all of


their customers” in one cloud area,


boasts Oracle’s Larry Ellison.

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