Oracle Corporation (ORCL) provides products and services for enterprise information technology (IT) environments. The company’s products and services comprise applications and infrastructure offerings that are offered internationally via several flexible and interoperable IT deployment models. These include on-premise, cloud-based, and hybrid deployments like the Oracle Cloud@Customer offering.
The company has been criticized by investors for years for neglecting to meaningfully innovate in the infrastructure space against giants such as Alphabet (GOOG), Amazon (AMZN), and Microsoft (MSFT). Oracle’s net income generation has been stagnant for years, with the company growing its EPS primarily through its aggressive stock repurchases.
While Oracle is, without a doubt, a cash cow that enjoys predictable and stable cash flows, the lack of substantial growth could be rather worrying. For this reason, I am neutral on the stock.
Latest Results and Shareholder Returns
Oracle’s Q2 2022 results, which the company released earlier in December, came in rather stable, with revenues growing 6% to $10.4 billion. The majority of Oracle’s revenues were produced by its Cloud segment, which comprised around 73% of Oracle’s total revenues during the quarter.
The company’s GAAP results were materially impacted by the payment of a judgment related to a ten-year-old dispute regarding former CEO Mark Hurd’s employment. That payment resulted in a GAAP operating loss of $824 million for the quarter or a loss of $0.46 on a per-share basis. Excluding this, however (non-GAAP results), operating income increased 6% to $4.9 billion, while EPS grew 14% to $1.21.
Oracle’s profitability growth was powered by a 22% growth in its Infrastructure and Applications Cloud businesses which are converging towards $11 billion in annualized revenues. The company’s BoD also enriched the company’s buyback authorization for share repurchases by $10 billion.
During the first six months of Fiscal Year 2022, Oracle repurchased around $15 billion worth of stock versus $8.9 billion in the comparable period last year. This implies a buyback yield of 12.7%, which is utterly huge.
To put things into perspective regarding Oracle’s aggressive stock repurchases, the company has reduced its share count by nearly half during the last decade alone. This has been a major EPS growth driver against relatively flat net income levels during this period.
Oracle has also grown its dividend-per-share for 12 consecutive years, with the latest dividend increase being by a substantial 33.3%. The company has already declared four $0.32 quarterly dividends. Hence, we will likely see another increase in its next dividend announcement. Combined with its buyback yield, Oracle’s current dividend yield of approximately 1.45% further adds to shareholder returns.
The Valuation
Based on Oracle’s performance during the first half of Fiscal Year 2022 and relatively predictable financials, the company should produce EPS of around $4.80 for the year. This implies a forward P/E of about 18.4, which sounds very reasonable for a major company in the tech sector.
That said, the humbler multiple is there for a reason, as Oracle is being left behind in terms of growth against its industry peers. Still, the company could be a solid value play for more conservative investors.
Wall Street’s Take
Turning to Wall Street, Oracle has a Moderate Buy consensus rating, based on six Buys and 14 Holds assigned in the past three months. At $105.07, the average Oracle price target implies 19.3% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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