Is Oracle Stock a Sell?

Oracle Corporation (NYSE:ORCL) once lagged behind in the technological race to software supremacy, but it rose over the last decade to become a titan of industry. The database pioneer has created a cloud-based platform that is relied upon globally by enterprises and that has catalyzed a sharp rise higher in its hare price, which begs the question is Oracle stock a sell now?

The company’s database and application business is in the running for a lucrative government contract with the Department of Defense yet it still lags behind rivals like Amazon.com, Inc.’s (NASDAQ:AMZN) Web Services, Microsoft Corporation’s Azure (NASDAQ:MSFT), and Alphabet Inc’s (NASDAQ:GOOGL) Google Cloud.

How Did Oracle Get So Big?

Oracle (ORCL) is an Austin, Texas-based enterprise IT cloud and hardware company co-founded by Larry Ellison, Bob Miner, and Ed Oates in 1977. The company became an early global leader in database technology and held its initial public offering (IPO) in March 1986.

Oracle grew both organically and through a series of mergers and acquisitions, including companies like Acme Packet ($2.1 billion), BEA Systems ($8.5 billion), Hyperion Corporation ($3.3 billion), and Sun Microsystems ($7.4 billion).

This aggressive acquisition strategy helped the company climb back from the lows of the stock market crash of 2001. Over the next 20 years revenues and profits soared as the company became ever more deeply embedded in enterprise ecosystems to the point that dislodging it is near impossible.

Oracle War Chest Ensures It Can Survive Busts

Oracle continues growing its revenue while boosting its margins year over year for the past several years. The first half of 2021 showed over $21.32 billion in revenue, with single-digit year-over-year increases each quarter. And its net income in the first quarter alone was nearly double the 2020 haul.

It has deep pockets, with over $46 billion in cash on hand heading into the back half of the year. That’s fueled by its $12.1 billion in free cash flow over the last 12 months. These deep pockets help fund its slow and steady cloud migration via a string of acquisitions. 

The company also implemented an aggressive stock buyback program through the 2010s and 2020s, buying back about 42 percent of its outstanding shares in the past decade. Of course, there’s criticism that the company’s buyback is meant to make earnings per share look more attractive.

Still, there’s plenty of talk of Oracle being possibly undervalued below $100 per share. 

Is Oracle Stock Undervalued?

Oracle’s cloud-based efforts may be lagging behind the industry giants listed above, but it is head and shoulders above a large portion of the market. This $332.3 billion market is expected to expand to a nearly $400 billion market next year, according to Gartner.

The company is a niche player with only around two percent of the cloud market share, which still places it a respectable fifth place in an ever more competitive market.

Oracle Database, the firm’s flagship object-relational database management platform, serves major clients, like Kirklands, Walmart, KBR, Sleep Number, Medtronic, and Purdue University. The company has also landed contracts as the cloud provider for major services like Zoom (ZM) and TikTok.

Based on a discounted cash flow forecast analysis, the fair market value for Oracle is around $77 per share. When the share price spikes above that level, it is considered overvalued.

Is Oracle Stock a Buy or Sell?

This underweight dividend stock seems an obvious Buy at first glance.

It pays a modest $1.28 annual divided to shareholders. It continues beating earnings estimates, and its fiscal year 2021 revenues were up four percent from the previous year.

Although the stock price has run past its intrinsic value, Oracle remains attractive in light of the sector’s projected growth forecasts. Oracle continues to outgrow the sector as a whole, which means investors should expect it to further capture market share.

Oracle Debt Is Surprisingly High

A fly in the ointment of any bullish Oracle investment thesis is the enormous debt on its balance sheet. It has over $87 billion in debt, with a sizeable chunk due within the next year, creating a heavy burden on it back. Debt can fuel more rapid growth – after all Oracle’s returns on capital proven that acquiring comparatively cheaper debt makes economic sense. But at some point the money starts to act as an anchor that prevents takeoff.

While the debt has the potential to stifle profits, there are no signs of it yet. Indeed revenues and earnings remain strong and have sustained through many economic booms and busts now, proving the firm’s moat – high friction for customers to leave – remains thoroughly in tact.

Nevertheless, management will need to continue spending heavily on R&D, as well as marketing and sales in order to grow in a market dominated by much bigger enterprise technology giants.

Is Oracle Stock a Sell? The Bottom Line

Oracle stock is flirting with all-time high valuations as liquidity continues to flood the stock market. In the cloud market where it is a goldfish relative to Amazon’s whale – it has captured just 2% market share – the firm has lots of opportunity. 

Add in a steady and stable dividend payment, and it could be enough to justify overlooking its hefty debt load. It may not have grown the way rivals Amazon, Microsoft, and Google did over the past twenty years, but Oracle is a rock solid company with time-tested financials and management to steer the company towards ever more profitability over the coming decades.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.