Yahoo Finance Why You Shouldn’t Buy Oracle Stock Here
Oracle Corporation (NASDAQ:ORCL) was one of the must-have stocks during the dot-com bubble of 1999. When the market cratered over the next few years as that bubble burst, Oracle stock lost 80% of its value. In fact, it only surpassed its all-time non-adjusted high of $46.31 (recorded on Sept. 1, 2000) earlier this year. So, if you bought Oracle stock at the top, you obviously haven’t been rewarded. Then again, if you bought Oracle stock at the bottom, you’ve averaged approximately 40% annual price appreciation ever since.
The business of ORCL has morphed over time, of course. It’s done better than some of its peers. International Business Machines Corporation (NYSE:IBM) is a dinosaur as far as I’m concerned. At least ORCL has been trying.
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Oracle stock was driven for a long time by its database products — a segment that stopped growing ages ago. So, Oracle had to pivot, which it did by jumping onto the front and back end of the cloud. It’s entered the space in smashing fashion, with almost 60% year-over-year revenue growth.
But it wasn’t easy.
This is where an understanding of corporate culture comes in handy. Oracle stock roared because it did something really well, mainly sales. I had a friend who worked at the company for a while in the late 1990s and he emphasized that he’d never seen the kind of sales staff and push for sales that he had at Oracle.
Sell, sell, sell. Sell that software; Sell that maintenance agreement. This made a lot of sense too, because it meant companies were plowing big bucks into Oracle products. It also meant they would be less likely to replace them because of sunk costs.
Then came the cloud.
It was simpler and had fewer costs. Instead of bulky and clunky software upgrade packages, upgrades were done, well, over the cloud. Gradually, ORCL started losing ground — so it joined the cloud crowd. So far, as mentioned, it is seeing solid growth. There’s about $5 billion or so in revenue from this new approach. While that only represents about 16% of total revenues, it has already outpaced both hardware and services revenue.
Plus, Oracle is still the leader in the legacy hardware sector. More importantly, while this area is experiencing revenue declines, Oracle stock still sees a massive free cash flow benefit from them. They are also extremely profitable.
While some businesses have legacy revenue generators, they don’t always translate to profits or cash flow. With ORCL, despite all the headwinds, its fiscal year 2015 net income was $9.94 billion, FY16 was $8.9 billion and FY17 was $9.34 billion. Free cash flow for those years was $13.2 billion, $12.4 billion and $12.1 billion respectively.
The dividend payout ratio was 20% to 23% during this time.
Meanwhile, Oracle stock enjoys a cash hoard of $66 billion. It does have $48 billion in debt, but debt service is less than 4% annually.
Still, I’m not crazy about Oracle stock as a possible buy. I think it’s too expensive (Oracle stock trades at about 22 times FY17 earnings, on about 9% EPS growth) and the future seems unclear as far as growth and competition goes. A 1.56% yield doesn’t make it attractive as a dividend stock, either.
I think if you own Oracle stock, you hold onto it, but I wouldn’t buy here, and I would look elsewhere for tech plays.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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