Amidst this diabolical brew of price hikes, high inflation and recession fears, the tech sector offers Few hiding places for investors.
The market is dumping the high-growth, nonprofit software stocks that have propelled the sector soaring during the pandemic. Consumer-facing e-commerce and hardware inventory is deteriorating, plagued by weak demand; The social media plays are taking a beating as ad buyers retreat; Supply chain issues are hitting chip stocks. Almost every tech stock has fallen during the year, with dozens discounting more than 50%.
In the past columns, you Make the case for betting on cloud computing, I think the story is still compelling. Recent earnings reports from
(Stock ticker: AMZN),
(GOOGL) explained that the demand for cloud computing services is large and growing. The promise of the cloud—improved flexibility and reduced costs—is fundamentally changing the way every company approaches computing.
In a research note last week, Credit Suisse analyst Phil Winslow wrote that corporate spending on public cloud should lead IT spending on on-premises infrastructure by 2024. It’s cloud computing, not just software, that’s eating the world. Winslow argues that Wall Street is underestimating Microsoft Azure’s growth potential. I see Microsoft and Amazon as the best long-term bets on the cloud.
But I also see an opportunity in another cloud play that’s still hiding in plain sight. In February 2021, I wrote a Rising Cover Story Around
(ORCL), making the enterprise application and database company quietly evolved into an underappreciated cloud story.
The company has been pushing its customers to adopt cloud-based versions of its software, while also launching Oracle Cloud, a nascent competition for three public cloud companies. Oracle’s move to the cloud was gaining momentum, but investors just didn’t catch it. As it turned out, Oracle was a great stock to own in 2021, up more than 70% by mid-December, as quarterly results showed consistent progress in the cloud strategy.
Then two things happened that blew up the inventory. On a macro level, the technology selling spree is gaining momentum. While sales started with pandemic darlings like
Zoom video communication
(PTON), it quickly spread everywhere, and Oracle was not immune. But the biggest issue was Oracle’s announcement in late December of A $28 billion cash deal To purchase Cerner, an electronic medical records company that serves hospitals and healthcare systems.
Over time, Oracle has made several big acquisitions — PeopleSoft, Siebel, Sun Microsystems — but Cerner is its biggest ever deal. Oracle is betting big on digitizing healthcare. It’s also a bet that Cerner’s software can be migrated to Oracle Cloud, resulting in huge savings. While Oracle has said the deal will be an immediate dividend boost, the deal raises concerns about integration risks, requires Oracle to take on additional debt, and mitigate what was a very aggressive stock buyback plan.
Since peaking just before the Cerner deal was announced, Oracle stock has fallen 38%, losing about $100 billion in market value.
Brad Zelnick, an analyst at Deutsche Bank, says the acquisition of Cerner has cast some doubts about Oracle’s shift to the cloud, which is why stocks are soaring in 2021. The deal provided ammunition for skeptics who were already concerned about Oracle’s cloud commitment.
But last week, Oracle earnings Provided new evidence That the transition is still in progress.
For the fourth quarter of the fiscal year ending May 31, Oracle reported revenue of $11.8 billion, an increase of 10% adjusted for currency, in the company’s best quarter of growth since 2011. That number exceeded the company’s guidance and Wall Street estimates.
Meanwhile, Oracle’s cloud business grew 22% in the quarter — and Oracle CEO Safra Catz told investors that cloud revenue growth should accelerate to 25% to 28% in the August quarter and 30% or more in fiscal 2023. ( On Friday, TikTok announced that it will Send all of his user traffic in the US to Oracle Cloud.)
Oracle shares rallied after the report, and actually closed higher for the week, a rare success in a dismal week for stocks.
Zelnick, who maintains a buy rating and a $110 target price for Oracle stock — a potential return of 70% — says Oracle’s guidance indicates continued single-digit revenue growth for the overall business on a currency rate basis.
While Zelnick acknowledges that no company is immune to a deep recession, he believes other dynamics will continue at Oracle in the coming months, setting the stage for the stock’s recovery. “They’re changing their own business, and they’re taking costs out of Cerner,” he says, “inflation is actually good for Oracle.” Zelnick explains that inflation-related increases are built into Oracle customer contracts. Meanwhile, conversion costs are so high for Oracle software that customers don’t show much resistance to price hikes.
Selling in Oracle stock made it cheap by most metrics. At $68 recently, it traded for 13 times less than Zelnick’s forecast for earnings of $5.36 per share for the May 2023 fiscal year and less than four times the post-Cerner revenue forecast of just under $50 billion. On both scales this is less than half of Microsoft’s rating.
If Oracle’s cloud growth vision is implemented, the stock should bounce, regardless of whether or not there is a recession.
write to Eric J. Savitz at firstname.lastname@example.org