Thesis
In my previous article about Oracle Corporation (NYSE:ORCL), I assigned a buy rating on Oracle citing that the decline in its stock after the release of Q4 2023 earnings opened an opportunity to enter. I assigned a fair price of $120.82 to $152.93, and a future price ranging from $179.20 to $218.82.
In this article, I will update my models with the latest financial information from the Q3 2024 earnings report, released on March 11. After the valuation process, I concluded that there is still a decent upside for Oracle of around 18.3%. This would mean a fair price of $148.51. The future price I calculated from Oracle was around $234.66, which translates into 17.4% annual returns throughout 2029. For this reason, I reiterate my buy rating on Oracle stock.
Overview
Oracle’s Growth Plan
Oracle’s revenue target is set at $65B by the end of 2026. If Oracle hit those targets, Larry Elisson would be paid $1.5B in stock options. A similar mechanism was employed by Tesla, Inc. (TSLA) with Elon Musk. Oracle is planning to achieve this target via cost increases, audits, and changing licensing terms. Another part of Oracle’s strategy is acquisitions, which they refer to as “selective and active” in their FY2023 10-K.
How does Oracle Compare Against Peers?
Regarding PaaS and IaaS, Oracle is way behind major competitors such as Amazon.com, Inc. (AMZN), and Microsoft Corporation (MSFT), which hold 31% and 24% of the market respectively.
If we examine the SaaS market independently, we will see that Oracle has a higher market share of around 6.33%, however, this pales behind Salesforce, Inc. (CRM), which holds around 12.3%. These figures were calculated by dividing the SaaS revenue of both companies and then dividing them by the 2023 volume of the SaaS market, $282B.
Industry Outlook
The Worldwide Public Cloud market is projected to have a market volume of $690.30B in 2024 and grow by 11.37% annually throughout 2028 when the market volume is expected to reach $1.06T.
The Public Cloud Market is divided into many segments, however, IaaS and SaaS are the ones that interest us. The SaaS market had a market volume of $282B at the end of 2023. For 2028, it’s estimated that the total market volume will reach $374.5B which is a CAGR of 7.33%.
Lastly, IaaS is estimated to reach a market volume of $195.2B in 2024 and then expand at a CAGR of 16.52% throughout 2028, when the market is expected to generate around $359.80 billion in revenue.
Q3 2024 Earnings
Q3 2024 earnings were released on March 11. For that quarter, Oracle beat EPS by $0.03, the quarterly PES came out at $1.41. Meanwhile, the reported revenue of $13.28B came in line with estimates.
Another important aspect is that Oracle mentioned that the demand for their Gen2 AI infrastructure exceeds supply. Additionally, it said that this product will remain in a hypergrowth phase for the foreseeable future.
This last thing is what makes me trust Oracle because it means this growth engine will help offset any reduction in the subscriber base of their Fusion, NetSuite, and Cerner offerings product of price increases.
Valuation
I will value Oracle through a DCF model. In the table below you will find all the current financial information about Oracle as of Q3 2024, which is necessary for the DCF model. The WACC will be calculated with the already-known formula. If you want a more detailed explanation, you can see the section in the DCF labeled “WACC Calculation”. In the case of Oracle, the WACC came out at 8.77%. Additionally, the “Equity Market Price” was the market cap of Oracle when I started to build the model. It’s important to clarify that the quotes you are going to see throughout this section are all part of Oracle’s FY2023 10-K.
TABLE OF ASSUMPTIONS | |
(Current data) | |
Assumptions Part 1 | |
Equity Market Price | 345,020.00 |
Debt Value | 87,980.00 |
Cost of Debt | 4.08% |
Tax Rate | 3.85% |
10y Treasury | 4.308% |
Beta | 0.92 |
Market Return | 10.50% |
Cost of Equity | 10.00% |
Assumptions Part 2 | |
CapEx | 5,981.00 |
Capex Margin | 11.39% |
Net Income | 10,642.00 |
Interest | 3,591.00 |
Tax | 426.00 |
D&A | 3,034.00 |
Ebitda | 17,693.00 |
D&A Margin | 5.78% |
Interest Expense Margin | 6.84% |
Revenue | 52,510.0 |
NetSuite has around 35,000 subscribers so dividing the 2024TTM revenue of $5.7B gives an average revenue per subscriber of $165K. However, for Fusion, I couldn’t arrive at a concrete user base so I will need to rely on my estimates. For doing this I first took the TTM revenue of the cloud services and license support segment of $38B, then I subtracted NetSuite, license support (which is around 22% of license cost), and Cerner. This left me with a result of $2.89B. Then later I assumed that Fusion users account for around 10K per each of the five segments, which gives a total of 50K. Then I divided the 2.89B by those 50K and I got an estimated annual expenditure per user.
Revenue Distribution of Cloud Services and License Support:
- Oracle Applications Technologies (47% of revenue): $17.86B
- Fusion = $2.89B
- Net Suite: $5.7B
- Cerner: $5.9B (FY2023)
- License Support: $3.18B
- Oracle Infrastructure Technologies (53% of revenue): $20.17B
Meanwhile, Cerner is estimated to have generated around $5.9 billion in revenues for 2023, which I divided by the estimated user base of 27.5K and I got that the average price was $214.54K per year.
Everything starts from our foundation of intelligent solutions for health and care and builds from there. We connect people and systems at more than 27,500 facilities worldwide…
Then, it’s Oracle infrastructure technologies, which is part of Oracle’s Cloud Services and license support. According to Oracle, this represented around 53% of the total segment’s revenue for 2023. Therefore I will maintain this same margin in my projection.
Oracle infrastructure technologies are marketed, sold, and delivered through our cloud and license business. Our infrastructure cloud services and license support revenues represented 53%, 58%, and 59% of our total cloud services and license support revenues during fiscal 2023, 2022, and 2021, respectively.
Now, regarding license support, nearly all customers (according to Oracle) buy license support with their Oracle license. The license support costs around 22% of the total price of the license.
Oracle Cloud license and on-premise license deployment offerings include Oracle Applications, Oracle Database, and Oracle Middleware software offerings, among others, which customers deploy using IT infrastructure from the Oracle Cloud or their own cloud-based or on-premise IT environments. Substantially all customers opt to purchase license support contracts when they purchase an Oracle license.
Then, I will assume that Oracle will continue its price hikes at an 8% annual rate and that the user base of each segment will grow at pace with the global public cloud market, which is expected to grow at a CAGR of 11.37% throughout 2028. You can see a more detailed view in the table below.
Lastly, I need to calculate net income, for this, I will use the net income margins that would have been derived from the average consensus if you divide the net income derived from EPS by the estimated revenue.
Net Income Margin % | |
2024 | 28.83% |
2025 | 29.63% |
2026 | 30.96% |
2027 | 29.54% |
2028 | 28.00% |
2029 | 26.42% |
Revenue | Net Income | Plus Taxes | Plus D&A | Plus Interest | |
2024 | $50,437.6 | $14,541.16 | $15,100.84 | $18,015.10 | $21,606.10 |
2025 | $56,894.6 | $16,857.88 | $17,506.73 | $20,420.99 | $24,279.87 |
2026 | $64,359.4 | $19,925.67 | $20,692.59 | $24,411.24 | $28,557.99 |
2027 | $73,012.1 | $21,567.78 | $22,397.91 | $26,616.51 | $31,072.59 |
2028 | $83,067.7 | $23,258.94 | $24,154.16 | $28,953.77 | $33,742.27 |
2029 | $94,782.3 | $25,041.49 | $26,005.32 | $31,481.80 | $36,627.50 |
^Final EBITA^ |
Lastly, I will suggest what could be the stock price for 2029. For this, I will try to predict the value of each element that conforms to equity. To make this I will assume that these elements will continue to evolve at the rate displayed in 2018-2029. This means that short-term debt will be increasing at an annual pace of 3.7%, and long-term debt by 7.8%. Meanwhile, marketable securities will contract at an annual pace of 9% and current assets by 12.05%.
As you can see, the model suggests a fair price of $148.51, which is an 18.3% upside from the current stock price of $125.54. The future price at which I arrived is $234.68, which suggests annual returns of 17.4% throughout 2029.
Finally, as you can see, despite Oracle’s infrastructure’s expected hyper-growth rates, I didn’t use it. However, If I implied that this segment would grow at a pace of 48% throughout 2028 meanwhile I drop the price increases to 2% of the other segments, the fair price would be $286.05 and the future price $461.60. This means that if Oracle is sure that it will maintain that high growth rate of 48%, then the stock price could go higher.
How do My Estimates compare with the Average Consensus?
If I were to make a model completely based on available average estimates, I would get a fair price of $147.40, a 17.4% upside from the current stock price of $125.54. The future price in this case would be $232.76 which suggests annual returns of around 17.1% throughout 2029.
As you can see in the graph below, which compares the results from my model and those of the average consensus, my estimates are lower for the years 2024 and 2025. After that, my estimates are on average 2.33% higher than the average consensus, which isn’t a big difference.
Risks to Thesis
The main risk to this thesis is Oracle’s balance sheet, which is not in the most desirable of conditions thanks to a multi-year stock repurchase plan that cost $75B and many acquisitions throughout the years, the latest one being Cerner.
This culture of share repurchase is particularly preoccupation because the only thing it does is increase the share price and leave Oracle with the economic cost. If Oracle hadn’t spent that $75 billion, it would have entered a more favorable position to the data center boom and its stock valuation would have been higher.
The other risk is related to price increases which at some point can be “excessive” in the eyes of customers, and this can cause Oracle to lose customers. To curb this risk, Oracle needs to remain a competitive option in terms of quality. Companies tend to use a mix of many providers to avoid relying on a single one. However, when economic conditions deteriorate, companies may decide to decide to stick with just one provider.
Conclusion
In conclusion, Oracle is better positioned in the SaaS market, by having a market share of around 6.33%, its Gen2 AI infrastructure has an extremely good outlook, and its pricing power, so far demonstrates that it can keep up with increasing costs by passing them down to its clients.
After doing a DCF model, I arrived at a fair price of $148.51 which is an 18.3% upside from the current stock price of $125.54. The model also suggested a future price for 2029 at around $234.68 which implies 17.4% annual returns throughout 2029.
Lastly, I recognize that Oracle is in a more delicate situation than other companies involved in the recent AI boom because its balance sheet is not in the best of conditions when compared to other peers. Nevertheless, if there aren’t further multi-year $75 billion stock repurchase programs, everything should be fine. For these reasons, I reiterate my buy rating on Oracle.