Should You Buy Oracle?
On July 15th 2020 we talked about the cloud and its enormous current and future potential in our article – Should You Buy Dropbox?
Today, we continue talking about he cloud a bit by talking about Oracle, which is a massive force in this arena.
But before we do that we need to talk about hardware and software… Because that’s what Oracles done best for the last 43 years since its founding.
Oracle sells hardware, databases, applications, and other solutions for the enterprise IT space.
Think big corporations.
It sells big companies’ hardware and software solutions to keep their internet and technology running inside the company so it can continue doing business.
And its been doing this since 1977 when it was founded by Larry Ellison, Bob Miner, and Ed Oates.
Since then its grown into arguably the world’s largest provider in this space. And as of the end of 2019 it was the second largest software company in the world by revenue and marketplace.
After its founding in 1977 the company went public on March 12th, 1986 to spectacular results for shareholders.
Since its IPO, its shares are up from a split adjusted $0.07 per share to $55.62 per share as of this writing.
This is an increase of 794X or 79,400% in 34 years.
If you invested $10,000 in Oracle stock in 1986 it would now be worth $7,940,000.
This is the power of Oracle, its main leader Larry Ellison, and the huge growth of computers, networking, and the internet in this time.
Because its hardware, software, services, and then cloud operations helped companies enormously other major players got into this same arena.
Its largest competition as of today are…
• Amazon Web Services
• And SAP
And this industry is still growing rapidly and will continue doing so for at least the next 20 years.
So should you buy Oracle today and hoper for another 794X return?
We’ll begin figuring this out by looking at its profitability and cash flow.
Is Oracle Profitable?
Let’s do a quick rundown of Oracle’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Oracle’s produced an average operating profit margin of 36.7% per year every year over the last 10 years.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
Its margin is 3.67X this minimum threshold.
What about its FCF/Sales?
Over the last 10 years Oracle’s FCF/Sales is 33.5% on average every year.
This is fantastic.
I look for companies to produce FCF/Sales at higher than 5% on a consistent basis. Oracle also crushes this number too.
Both operating profit and free cash flow are important because they help show you the true profitability of the company.
The more profitable a company is the higher its value goes over time. And the more money it can spend on innovations and serving customers.
I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… And Oracle crushes them.
That puts it in the great operating company arena which is rare.
It well surpasses what I look for on a minimum profitability basis… But what about its valuation?
Oracle Is Undervalued Too
As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.
Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.
Because if you buy overvalued assets there is a lower margin of safety. Which means the investment is riskier.
I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.
And surprisingly Oracle falls into the undervalued category…
Its current P/E is 18.4.
Its current P/CF is 13.3.
And its forward P/E is 14.6
I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.
These show that even though its operating at an incredibly high level that its shares are undervalued.
If you’re looking for a great potential stock investment look at buying Oracle for the reasons mentioned above.
And if you’re looking for some other investment ideas make sure to check out some of our other recent articles below.
Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.