Oracle Corporation (NYSE:ORCL): Its 50% more valuable than Adobe and double IBM! Why the high price tag?

Nick Sundich Nick Sundich, June 3, 2024

Oracle Corporation (NYSE:OCL) is one of the world’s largest software companies. Capped at $340.1bn, it is not one of the Magnificant Seven stocks, but is nearly 50% more valuable than Adobe (NYSE:ADBE) and more than double IBM (NYSE:IBM). While the latter two companies would be household names, Oracle may not be. Nonetheless, Oracle has gained over 140% in the last 5 years, well ahead of Adobe and IBM shares. And so we thought we’d look into the company.

 

Oracle (NYSE:ORCL) share price chart, log scale (Source: TradingView)

 

Introduction to Oracle Corporation (NYSE:ORCL)

Oracle is the world’s largest database management company, providing services through the Cloud and on-premise, although it is the former that is becoming increasingly important. This is not just because of the rise of the Cloud, but the explosion in data. Oracle’s software helps businesses manage and organize their data more effectively.

The company was founded in 1977 by Larry Ellison, Bob Miner and Ed Oates, and listed in 1986. Only Ellison is still involved today with Miner having died in the 1990s and Oates retiring from the company around that time. Its first product was Oracle Database, the first commercially available relational database management system to use the programming language SQL. It has grown itself through internal innovation (it has spent over US$110bn in the last decade on R&D) and through M&A. In FY23 (the company uses a June-May financial year), the company made US$50bn in revenue and boasted 430,000 customers in 175 countries.

 

When do we want it? Now!

In its update for the the March quarter of FY24 (the 3 months to March 31, 2024), the company claimed to have US$80bn in total Remaining Performance Obligations. This figure, which was up 29%, was an all time record and shows that demand for the Cloud is like Airbus aeroplanes. Customers are signing deals on the dotted line even if they cannot get the service for a few years. They just want it as soon as possible, even if that is a 3-4 years. Better than 8-10 years.

Oracle can even use its technology to close its books and reports in less than 10 work days. 54% of manual accounting has been eliminated, 97% of bank account transactions are automatically reconciled and 80% of transactions are automated.

 

A move to Music City highlights the company’s future plans

Until 2020, Oracle was based in Silicon Valley, only to move to Austin, Texas. In April 2024, the company announced intentions to move to Nashville, Tennessee, less than 4 years since that earlier move. Although it won’t have its planned offices open and operating until later this decade, the company has done a deal with the city.

Why the move? We speculate that it is home to a number of healthcare companies (startups, big publicly traded corporations and hospital chains), and Oracle likely wants a share of that pie. Key to its ambitions was its $28bn purchase of health IT company Cerner, which has been renamed Oracle Health. Cerner was (and is now) one of the most widely used electronic health record systems. Being backed by Oracle’s technology will take Cerner to the next level.

 

Slow, but steady growth

The company’s FY24 results are due by the end of June and analysts are expecting $53.3bn in sales and a $10.8bn profit (up 7% and 23% respectively). In FY25, $57.8bn in sales and a $12.3bn profit (up 8% and 17%), followed by $63.6bn in sales and a $15.3bn profit (up 10% and 24% respectively). The mean target price is US$137.17 per share, a premium of only 11% to the current share price as of May 30, 2024. Granted, the estimates vary from US$83 on one hand and US$160 on the other.

The company has an FY25 P/E of 19.8x, EV/EBITDA of 14.1x and a PEG of 1.7x, which all appear reasonable. Our long-term readers will note we have stated in the past that a PEG of more than 1x indicates a stock is overvalued relative to its growth. While we are not backing away from this, we would observe a couple of points. First, it is not unusual for US stocks to trade above that. Second, many of Oracle’s peers have a higher PEG multiple – Microsoft has 2.4x and IBM has 3.9x.

Whether or not you wish to buy Oracle stock, it is certainly a company worth knowing about. And it has significant growth potential down the track, with a proven-track record to ensure the company can be trusted.

 

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