Oracle’s (ORCL) Cloud Soars: 10% Stock Jump, but Is It a Buy?

Markets loved what they heard from Oracle (ORCL) this week, sending the stock up over 10% after the company announced earnings.

The company topped estimates on earnings and revenues, turning the heads of financial pros, according to our TrackStar data.

Oracle quickly saw as many searches as Microsoft, with investors keying in on new partnerships with Amazon Web Services and Google Cloud.

Plus, Larry Ellison’s investments in large Nvidia GPU clusters have started to pay off.

Yet, with the company trading at 31x forward earnings and 18x forward operating cash flow, does this tech behemoth deserve your cash?

Oracle’s Business

In the digital age, Oracle reigns as the database king. This tech titan has morphed from a software giant into a cloud computing powerhouse, reshaping how businesses harness data.

Oracle’s tentacles reach far and wide. It arms 430,000 customers across 175 countries with arsenal of cloud apps, databases, and engineered systems. From Fortune 500 juggernauts to scrappy startups, Oracle’s tech keeps the business world spinning.

Oracle’s revenue streams flow from four key channels:

• Cloud services and license support (79% of total revenues) – The cloud cash cow, milking subscriptions and support fees
• Cloud license and on-premise license (7%) – Old-school software licenses for cloud and earthbound systems
• Hardware (5%) – Beefy servers, storage, and industry-specific gadgetry
• Services (9%) – Brain power for hire: consulting, premium support, and tech education

Oracle just flexed its financial muscles, posting a beefy 7% revenue jump to $13.3 billion. 

Cloud services surged 21%, proving Oracle’s bet on the cloud is paying off big time. 

AI fever has gripped Oracle too. The company inked 42 cloud GPU deals worth a cool $3 billion, signaling an AI gold rush in enterprise tech. 

With 162 data centers globally and more under construction, Oracle’s building a cloud empire that’s ready to rain data on demand.

Financials

Source: Stock Analysis

Oracle’s has struggled for years to break out of its single-digit organic growth mode.

While hardware and services continue to drag sales, cloud services and support jumped 10% YoY for the quarter, marking a notable gain for the company’s largest revenue category.

At the same time, operating margins improved 4% YoY for the quarter as did operating income.

Operating cash flow also climbed to $19.1 billion for the trailing 12-month period, its highest level in over a decade.

However, Capex, remains high at $7.9 billion.

Nonetheless, that’s left plenty of cash to reduce total debt by $10 billion to $84.5 billion while paying out a combined $7.4 billion in dividends and share buybacks, yielding just shy of 2%.

Valuation

Source: Seeking Alpha

Compared to its peers, Oracle seems to trade at a slight premium.

While it’s cheaper than Microsoft (MSFT) on a price to cash flow ratio basis, it’s more expensive on a price to earnings ratio basis. It’s also far more expensive than Dell (DELL) on both those measures.

However it is cheaper on a price to cash flow basis than both Zscaler (ZS) and Palo Alto Networks (PANW), though not by much.

Growth

Source: Seeking Alpha

What’s concerning is Oracle isn’t cheap yet it doesn’t come with the same kind of revenue growth as its peers.

Oracle hasn’t even reached double digit year over year gains while everyone else on this list has and has done so for years except Dell.

Profitability

Source: Seeking Alpha

The one thing Oracle has going for it are its margins.

However, its free cash flow margin is 10% lower than most of the others on this list. That needs to be better for a tech company without double digit sales growth.

Our Opinion 5/10

Oracle is a steady company that generates a healthy amount of cash.

But it’s overpriced and despite strategic investments, isn’t going to see gangbuster growth anytime soon.

We’d treat it more like a blue chip stock, only taking positions when the stock trades at an obvious discount.