1 More Reason To Buy Oracle
Two months ago I answered the question Should You Buy Oracle? By telling you that you should after evaluating its stock.
Today I show you 1 More Reason To Buy Oracle.
You can read the original full article above.
But if you don’t want to; here’s a quick recap of why I said you should buy Oracle.
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 the 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 it’s been doing this since 1977 when it was founded by Larry Ellison, Bob Miner, and Ed Oates.
Since then it’s 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 it’s hardware, software, services, and then cloud operations helped companies enormously other major players got into this same arena.
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
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.
This thesis to buy Oracle continued to prove out on September 10th, 2020 when it announced its most up to date quarterly numbers.
- Revenue was up 2% to $9.4 billion in its 1st quarter 2021 results compared to the same quarter last year.
- Operating income was up 12% to $3.2 billion in its 1st quarter 2021 results compared to the same quarter last year.
- And net income was up 5% to $2.3 billion in its 1st quarter 2021 results compared to the same quarter last year.
These results were so good that Oracle shares hit an all-time high share price on September 11th, 2020.
Then it hit another all-time high of $60.86 per share on September 14th when Oracle announced that it beat out Microsoft and Walmart to buy popular app Tik Tok.
I’ll update you on this transaction as it progresses.
Plus, it’s still cheap…
As of this writing its P/E is now 18.
Its P/CF is 14.
And its forward P/E is 14.1.
Oracle is a great stock to buy and hold for the long term to not only see appreciation in your shares over time.
But also, to earn cash now with its 1.7% dividend.
For the reasons in this article and the earlier one I recommend you buy Oracle for the long term.
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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.