Yahoo Finance Oracle's Strategy to Hit $10 Billion in SaaS Revenues
- By Sangara Narayanan
Oracle (ORCL) was very late to the cloud party, but the company has gotten aggressive with its strategy as it tries to beat Salesforce (CRM) to reach the $10 billion in annual sales mark with its Software-as-a-Service (SaaS) products.
There is a lot of competition in the SaaS segment, especially in the business management software area that Oracle wants to win over. Salesforce, Oracle, SAP (SAP) and Microsoft (MSFT) are the top four companies vying for the lead position in the enterprise software segment. Salesforce has a solid lead when it comes to the CRM sub-segment, while Oracle has a wide range of products spanning Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), Human Capital Management (HCM) and Supply Chain Management (SCM).
Warning! GuruFocus has detected 4 Warning Signs with AMZN. Click here to check it out.
The intrinsic value of ORCL
The question now is, what's the scope for growth with so much competition entering the business management SaaS space? Let's look at the forecasts for the segment:
CRM and ERP are the two largest categories within the SaaS business management segment. According to Gartner, the CRM market is expected to overtake ERP to become a $36 billion market in 2017, while ERP is expected to hit $34 billion in size.
In 2015, when the CRM market reached $26.287 billion in revenues, Salesforce brought in $5.17 billion of that, accounting for nearly 20% of the market. It's a niche segment, and it won't be that easy to topple Salesforce from their dominant position. That's one of the reasons Oracle invested nearly $10 billion to acquire Netsuite last year. By adding ERP strength to its portfolio, Oracle inorganically strengthened its SaaS portfolio in one key area where Salesforce is weak.
For a lot of enterprises, a single-vendor solution for SaaS products is preferable, and that's how Oracle wants to position itself. Microsoft is taking baby steps towards that same goal as well as it uses its strength in one SaaS area (Office 365) to strengthen another (Dynamics 365.) Both companies know that the head-on approach to taking on a segment leader like Salesforce is not the best solution.
Salesforce's total revenues during the most recent quarter were $2.14 billion, a growth of 25% year over year, while Oracle's revenues from SaaS/PaaS reached $878 million during the most recent quarter, a growth of 81% year over year. Oracle's growth rate is indeed spectacular, but its number is much smaller compared to what Salesforce already has.
There's no doubt Oracle can close the gap with Salesforce on the SaaS front, due to sheer breadth of its services. But it needs at least another two years to catch up because Salesforce isn't going to slow down and make it easy for Oracle. In fact, Salesforce is expecting 21% growth for 2018, so the road for Oracle could be a little longer than expected.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with AMZN. Click here to check it out.
The intrinsic value of ORCL
