In the wake of its "disappointing" second quarter operating report Wednesday, is the sharp sell-off this week of Oracle Corp. (ORCL - Get Report) an overreaction?
Oracle on Dec. 16 reported that earnings dipped to $2.2 billion, for earnings-per-share (EPS) of 51 cents, from $2.5 billion, or EPS of 56 cents, a year ago. Total revenue fell 6.3% year over year to $8.99 billion, missing the consensus estimate of $9.06 billion.
Oracle on Dec. 16 reported that earnings dipped to $2.2 billion, for earnings-per-share (EPS) of 51 cents, from $2.5 billion, or EPS of 56 cents, a year ago. Total revenue fell 6.3% year over year to $8.99 billion, missing the consensus estimate of $9.06 billion.
ORCL data by YCharts
Investor reaction was swift and negative: Oracle on Dec. 17 suffered its worst day in more than two years, declining $1.98, or 5.1%, to $36.93.
The real story, though, is that Oracle's depressed stock price represents an early Christmas present for bargain-shopping investors. And it won't stay down for long, because the stock meets the value investing criteria routinely applied by another "Oracle," Warren Buffett. Let's examine what the investment herd is overlooking.
The second quarter decline was largely due to a strong dollar and economic headwinds overseas, factors that should prove ephemeral. Investors didn't seem to notice that revenue from cloud services in the second quarter increased a whopping 34% year-over-year to $484 million.
Oracle is a long-time leader in database, applications and other software. Founder Larry Ellison's visionary strategy more than five years ago to emphasize cloud computing has linked Oracle to an unstoppable trend that will unfold far into the foreseeable future. The cloud sales momentum of the second quarter should continue unabated in 2016.
Ellison now serves as Oracle's executive chairman and chief technology officer, having previously been chief executive officer from its founding until September 2014. In 2014, he was listed by Forbes as the third-wealthiest man in the United States and as the fifth-wealthiest person on the planet, with a net worth of $56.2 billion.
So Ellison may know what he's doing -- and he wisely bet the farm on the cloud.
The real story, though, is that Oracle's depressed stock price represents an early Christmas present for bargain-shopping investors. And it won't stay down for long, because the stock meets the value investing criteria routinely applied by another "Oracle," Warren Buffett. Let's examine what the investment herd is overlooking.
The second quarter decline was largely due to a strong dollar and economic headwinds overseas, factors that should prove ephemeral. Investors didn't seem to notice that revenue from cloud services in the second quarter increased a whopping 34% year-over-year to $484 million.
Oracle is a long-time leader in database, applications and other software. Founder Larry Ellison's visionary strategy more than five years ago to emphasize cloud computing has linked Oracle to an unstoppable trend that will unfold far into the foreseeable future. The cloud sales momentum of the second quarter should continue unabated in 2016.
Ellison now serves as Oracle's executive chairman and chief technology officer, having previously been chief executive officer from its founding until September 2014. In 2014, he was listed by Forbes as the third-wealthiest man in the United States and as the fifth-wealthiest person on the planet, with a net worth of $56.2 billion.
So Ellison may know what he's doing -- and he wisely bet the farm on the cloud.
According to the IT consultancy Gartner, worldwide IT spending will exceed $4 trillion a year by 2015, up from $3.7 trillion in 2013. A catalyst for this growth is cloud computing, the increasingly popular practice of using a network of remote servers hosted on the Internet to store, manage and process data. The cloud allows organizations to enhance IT capabilities without creating infrastructure, hiring new personnel or buying software.
Cloud computing represents the logical convergence of all previous technologies. It allows for greater efficiency, massive scalability and faster programming. It also spares companies the necessity of buying software and hardware to deploy their applications.
With the cloud, companies enjoy the option of only paying for the computing resources that they need, when they need it, because the applications, hardware, and data reside somewhere in the cloud. As a company's computing requirements grow, the attendant hassles and capital expense become someone else's issue.
The cloud's fast growth is propelling sales of server, storage and networking equipment, prompting hardware makers to unveil new features chiefly targeted to cloud service providers.
As they seek reductions in overhead, many large companies have already identified IT "infrastructure" as a non-core function. They're transferring platform, software, configuration, identity and even data into the most cost effective and capable hands, by hiring cloud companies such as Oracle.
For IT customers willing to take the "plunge" and adopt cloud architecture, the payback will be enormous levels of efficiency and productivity that will show up on the bottom line.
Under Ellison's guidance, Oracle anticipated this revolution in computing long before most of its peers, such as IBM, and strategically pivoted to the nascent trend at a time when many Wall Street analysts thought it was a misstep. A strong balance sheet ($52.34 billion in cash in the most recent quarter), smart management, and dominance of a secular trend are the value investing metrics that another multi-billionaire, Warren Buffett, likes to see.
Among Ellison's key acquisitions in the cloud space was cloud-service marketer Responsys. Oracle also boughtRightNow Technologies in 2011 for $1.5 billion, Taleo in 2012 for $1.9 billion, Eloqua in 2012 for $810 million andAcme Packet in 2013 for $2.1 billion.
Prior to their acquisition by Oracle, all of these cloud-based software solutions providers had competed among themselves. The consolidation of their expertise and client networks under one umbrella should drive Oracle stock over the long haul, despite this latest quarterly hiccup.
Oracle's vast client base remains intact and growing, especially in the public sector, and a planned round of cost-cutting in 2016 should boost margins. In the meantime, the stock trades at a ridiculously cheap trailing 12-month price-to-earnings (P/E) ratio of only 17.31, compared to the trailing P/E of 37 for Microsoft and 37.57 for the industry.
As I've just explained, Oracle looks like a great buy now. With 2016 looming on the horizon, what is Warren Buffett buying and selling today? For our free and detailed report on the Oracle of Omaha's latest investment choices, click here. Our report tells you exactly what Buffett is adding to Berkshire Hathaway and why.
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