Thursday, July 12, 2018

Like Other Old-Tech Names, Oracle's Value Is Tied To Its Ability To Reignite Growth

Reading the sell-side research on Oracle (ORCL), I’m struck by how frequently the analysts benchmark Oracle’s valuation multiples (whether it’s P/E, EV/FCF, EV/revenue, et al.) against the peer/industry group in an attempt to make the “Oracle is undervalued” case, but neglect to benchmark the company’s revenue growth rate. While margins and free cash flow certainly do matter, revenue growth is a significant near-term driver for valuation multiples, and Oracle’s growth rate is much more in the CA Inc. (CA)/IBM (IBM) neighborhood than the Microsoft (MSFT)/Adobe (ADBE) neighborhood of older tech stocks.

Given the weak growth rate, the recent trends in Oracle’s position in sell-side CIO surveys, and the company’s ongoing challenges with the on-premises-to-cloud transition, I can’t work up much enthusiasm for the stock. While many old-tech companies have faced challenges in their attempts to renew themselves and remain competitive (Microsoft had its issues, IBM is still in the middle of them…), I just don’t see enough of a discount here to take on the incremental execution risk.

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Like Other Old-Tech Names, Oracle's Value Is Tied To Its Ability To Reignite Growth

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