Stock Analysis & Ideas

Oracle Corporation: Cash Cow with Big Return Yield

Oracle Corporation (ORCL) offers products and services for enterprise information technology (IT) environments.

The company’s offerings include applications and infrastructure products and services that are delivered across the globe through multiple flexible and interoperable deployment models.

These include on-premise, hybrid deployments like the Oracle Cloud@Customer, and cloud-based avenues,

Oracle investors have been increasingly worried over the past several years amid concerns over the company’s ability to meaningfully innovate in the cloud infrastructure space against behemoths such as Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT).

However, Oracle continues to produce robust net income levels, even if its net income generation has indeed remained rather stagnant for years.

Shareholder value creation is likely to be powered almost exclusively through Oracle stock repurchases, which artificially boost the company’s per-share metrics.

In my view, Oracle remains, without a doubt, a cash cow that should continue to enjoy predictable and durable cash flows.

However, the lack of considerable growth could be indeed a serious concern as far as the firm’s longevity goes in an ever-changing tech environment. For this reason, I am neutral on the stock.

Recent Developments

Oracle’s Q3 2022 results came in rather strong, with revenues growing 7% to $10.5 billion. The largest chunk of Oracle’s revenues were sourced from its Cloud segment, which comprised around 72.3% of the company’s total revenues during the quarter.

While Oracle’s growth remains indeed a fraction compared to that of its industry peers, it’s worth noting that in Q3, the company recorded its highest quarterly organic revenue growth rate since it initiated its transition to the cloud.

More importantly, the big picture is that Oracle’s overall revenue growth is being propelled by both the company’s swiftly expanding Cloud Infrastructure and Cloud Applications businesses.

Specifically, Q3 Cloud Infrastructure revenue came in 47% higher year-over-year in constant currency. Cloud Applications’ expansion was powered by Fusion ERP, which achieved growth of 35% in constant currency, and NetSuite ERP revenues which rose 29% in constant currency.

As a result, total Cloud revenues, which comprise Cloud Infrastructure and Cloud Applications, now feature an annualized revenue run-rate of over $11 billion a year. Thus, the company should end Fiscal 2022 with record revenues.

As far as the company’s profitability goes, operating expenses increased 10% during the quarter as Oracle continued to invest in meeting its clients’ growing demand for its cloud services.

However, gross margins for cloud services and license support remained rather rich at 84%. More importantly, management anticipates that full-year growth in gross profit dollars for cloud services and license support will grow compared to last year, implying strong margins in the upcoming quarter as well.

Now note that due to litigation-related charges totaling $4.7 billion, the company has recorded EPS of $1.30 during the first nine months of Fiscal 2022, significantly lower than the previous year’s $3.26 over the same period.

However, this is only due to a one-off effect, which is the reason analysts expect adjusted EPS of around $4.76 for the year, which actually implies growth of 1.86% over Fiscal 2021.

Capital Returns

In order for Oracle to keep shareholders satisfied during the past decade, a period of relatively underwhelming growth relative to its industry peers, management’s strategy to deliver value creation has been providing robust capital returns.

Oracle has increased its dividend-per-share for 12 consecutive years, with the latest dividend hike being by a considerable 33.3%. The company has already declared five $0.32 quarterly dividends, which is a bit underwhelming in terms of DPS growth consistency.

In any case, Oracle has six quarterly “chances” to grow the dividend before losing its current streak. The current annualized DPS rate of $1.28 combined with analysts’ EPS estimate of $4.76 implies a rather healthy payout ratio of 26%.

In addition to dividends, Oracle has an extended track record of aggressive stock repurchases. During the first nine months of Fiscal 2022, Oracle repurchased around $15.6 billion worth of stock versus $12.9 billion in the comparable period last year.

Assuming the company buys back close to $20 billion worth per year (which is, in fact, below its historical average), this suggests a buyback yield of around 9.9%, which is rather massive.

To put Oracle’s buybacks into perspective, the company has nearly halved its share count during the last decade alone. This has been a prominent EPS growth catalyst against somewhat flat net income levels during this period.

If we combine Oracle’s dividend yield of around 1.6% with its buyback yield, Oracle features a combined investor yield north of 10%.

Wall Street’s Take

Turning to Wall Street, Oracle has a Moderate Buy consensus rating based on six Buys, 11 Holds, and one Sell assigned in the past three months. At $91.65, the average Oracle price target implies 10.5% upside potential.


Oracle enjoys rather predictable cash flows, which, combined with its high-margin business model, makes the company a cash cow.

On the hand, capital returns to shareholders are too juicy to ignore. Through Oracle’s dividend and stock repurchases, shareholders are likely to enjoy double-digit annualized returns over the medium term.

On the other hand, and despite Oracle delivering the highest organic revenue growth in the cloud in over 10 years, the company could be falling behind its faster-growing industry peers. This could be an issue regarding Oracle’s long-term prospects. Accordingly, I am neutral on the stock.

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