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.