Robust Margins And Growth In Cloud Infrastructure Should Boost Oracle Stock

seekingalpha04-18

Oracle's Cloud Services segment grew 25% YoY in Q3 FY24 led by OCI. At the same time, its RPO grew 29% YoY, as Oracle wins larger customer deals.I believe it should meet its FY26 revenue projection of...

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At the same time, its RPO grew 29% YoY, as Oracle wins larger customer deals.I believe it should meet its FY26 revenue projection of...</p>\n\n<a href=\"https://seekingalpha.com/article/4684392-robust-margins-growth-cloud-infrastructure-should-boost-oracle-stock\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Robust Margins And Growth In Cloud Infrastructure Should Boost Oracle Stock</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRobust Margins And Growth In Cloud Infrastructure Should Boost Oracle Stock\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-18 18:25 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4684392-robust-margins-growth-cloud-infrastructure-should-boost-oracle-stock><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Oracle's Cloud Services segment grew 25% YoY in Q3 FY24 led by OCI. At the same time, its RPO grew 29% YoY, as Oracle wins larger customer deals.I believe it should meet its FY26 revenue projection of...</p>\n\n<a href=\"https://seekingalpha.com/article/4684392-robust-margins-growth-cloud-infrastructure-should-boost-oracle-stock\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4514","symbol_name":"搜索引擎","start_time":0,"source_url":"https://seekingalpha.com/article/4684392-robust-margins-growth-cloud-infrastructure-should-boost-oracle-stock","article_id":"2428566161","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/630019720/image_630019720.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2428566161","pubTimestamp":1713435941,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Oracle's Cloud Services segment grew 25% YoY in Q3 FY24 led by OCI. 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At the same time, its RPO grew 29% YoY, as Oracle wins larger customer deals.I believe it should meet its FY26 revenue projection of $65B as it continues its investment in AI and data centers, while forging a strategic relationship with Nvidia.While competition from larger hyperscalers in the cloud infrastructure market remains a concern, I believe the stock is well positioned to drive a sizable upside of 38%.   Just_Super Introduction & Investment Thesis Oracle (NYSE:ORCL) is a provider of enterprise applications and infrastructure offerings that have outperformed the S&P 500 and Nasdaq 100 YTD. The company reported its Q3 FY24 earnings in March, where revenue and earnings grew 7% and 16% YoY, respectively. However, the main driver of my optimism in Oracle is the growth in its Cloud Services business segment, which grew 25% YoY to $5.1B and topped revenue from its License Support for the first time ever. Oracle’s Cloud Services segment houses the Oracle Cloud Infrastructure (OCI) subunit. The company had projected to grow its revenue to $65B by FY26, with a non-GAAP Operating margin of 45%, and I believe it can achieve that as it wins larger customer contracts, as demonstrated by the 29% growth in Remaining Performance Obligations (RPO) in Q3, indicating strong customer confidence and adoption, as it rapidly builds its AI capabilities and data centers to increase its capacity and meet growing demand. Simultaneously, the company is also expanding its customer base to include sovereign entities, which I believe will be a further catalyst for revenue growth. While competitive threats remain from deep-pocketed hyperscalers in the cloud infrastructure space, I believe that the stock is well positioned to drive an approximately 38% return until FY26, making it a “buy”. About Oracle Oracle provides enterprise applications and infrastructure offerings through flexible IT deployment models, that include on-premise, cloud, and hybrid, so that their customers can build, run, and manage their workflows and operations efficiently and securely. The company has three business segments that include the following:  Cloud and License: In Q3, Cloud and License represented 84.4% of total revenue, with their Cloud Services growing 25% YoY. In terms of its business model, Oracle derives its revenue through a combination of license support revenues from customers who have chosen to purchase support services in addition to Oracle applications and infrastructure licenses, cloud service revenues in the form of a subscription agreement where customers get access to Oracle applications and infrastructure, and cloud and on-premise license revenue from their software products that include Oracle Applications, Oracle Database, and others. Hardware: In Q3, the Hardware segment declined 7% YoY to $754M, contributing 5.6% to Total revenue. The hardware business provides enterprise hardware products that include servers, storage, operating systems, and others. Services: The Services segment declined 5% YoY to $1.3B in Q3, representing 9.8% of Total revenue. Oracle derives revenue from its Services segment by providing consulting services and advanced customer service to help their customers and partners maximize their return on investment in Oracle Applications and infrastructure technologies.  The good: Strong growth in its Cloud Services, driven by OCI, Partnership with Nvidia, Expansion into Sovereign Entities, Robust Margins Oracle reported its Q3 FY24 earnings report in March, where revenue and earnings grew 7% and 16% YoY, respectively. However, when we dig deeper into the report, we can quickly see that its Cloud Services segment is seeing tremendous momentum, growing 25% YoY, driven by OCI. During the earnings call, Safra Catz, CEO of Oracle, said the following, which highlights the management’s optimism as Cloud services revenue topped its total license and support revenue, contributing 38% to Total Revenue. “OCI has emerged as the largest driver of our overall revenue acceleration growing much, much faster than our cloud competitors. Customers have figured out that by moving to OCI they can really get more while paying less, but it's not just the cost that matters to our customers.” Q3 FY24 Press Release: Oracle's strong growth in its Cloud Services segment I believe that Oracle’s outperformance in its Cloud Services segment, specifically in OCI, is a testament to the confidence of its customers in choosing Oracle as their partner to efficiently and securely run enterprise-scale workloads. At the same time, the company is also investing heavily in building out AI capabilities across their Fusion and Industry Cloud Applications and Autonomous Database, which I believe will only get better in order to help their customers drive optimal business outcomes. Finally, Oracle’s deployment flexibility is also a huge advantage, as their customers can choose the product, service, and deployment combinations that best suit their needs and remain agile at the same time. This is an example that Larry Ellison, CTO of Oracle, spoke about that illustrates how its infrastructure business is booming, not just from selling infrastructure for training AI models but also to serve verticalized industry-specific applications, like the one below. “The best example is in Healthcare where our new Ambulatory Clinic System is being delivered to customers this Q4. This completely new application features a voice interface called the Clinical Digital Assistant. The Clinical Digital Assistant listens to a doctor's consultations with a patient and automatically generates prescriptions, Doctor's orders, doctor's notes, then automatically updates the patient's electronic health records.” Another testament to the momentum is that the company saw its RPO grow 29% YoY to $80B, which reflects that customers are wanting larger contracts. I believe this further positions Oracle’s Cloud Services for extensive growth as it builds out its data center capabilities to meet growing demand, while organizations increasingly look to integrate across multiple cloud platforms. During the earnings call, the management outlined that they expect to see 43% of their total RPO recognized in revenue over the next 12 months as they sign on several large deals. Meanwhile, Oracle recently extended its collaboration with Nvidia (NVDA), as Nvidia selected Oracle’s OCI as its provider to offer NVIDIA DGX Cloud, which is an AI supercomputing service, as organizations require increasing computing resources for their unique AI use cases. Finally, I am optimistic as Oracle expands its customer base to sovereign nations and builds out its OCI offering, where they already have 11 dedicated region slots and 13 more planned. I believe we will continue to see growth in this segment as governments increasingly embrace the sovereign cloud, an area that has historically been closed to private data centers for security purposes. Shifting gears to profitability, Oracle generated $5.8B in non-GAAP operating income, which grew 12% YoY at a margin of 44%. Compared to last year, it was able to streamline its Sales and Marketing spend to 16% of total revenue, compared to 18% in the previous year. Most importantly, as the company continues to see larger contract sizes per customer and deeper adoption, it will be able to gain economies of scale while expanding its margins and free cash flow. The bad: Deep-pocketed hyperscalers with larger market shares in cloud infrastructure can dampen Oracle’s growth, while growth from Cerner needs to pick up While Oracle is strategically investing in its OCI and SaaS components of its business segments, as both of these segments are well positioned to grow at a compounded annual growth rate (CAGR) of 7.3% and 16.5% to $375B and $360B, respectively, the company faces severe competition from leaders such as Amazon (AMZN), Microsoft (MSFT), Google (GOOG) and other deep-pocketed players with strong pricing, who are much further ahead, when it comes to their respective market share of the cloud infrastructure market. Should Oracle fail to gain incremental market share in the coming years in its Cloud Services segment, I believe that it will see the growth rate in its revenue and profit margin stall quite rapidly. Meanwhile, the management outlined that Cerner will continue to be a headwind in 2024. Oracle had acquired Cerner for $28B in 2022 in order to expand into healthcare and scale up its cloud business in the hospital and health system markets in order to enable better treatment decisions and patient outcomes. However, the management remains optimistic that Cerner will return to growth in 2025, while further affirming their FY26 goal for revenue at $65B and maintaining a non-GAAP operating margin of 45%. This would imply an annual revenue growth of about 10%, which I believe is encouraging as macroeconomic uncertainty and recession risks continue to persist, while a 45% operating margin is also noteworthy given near-term profitability pressure from Cerner. Tying it together: Oracle is a “buy” For Q4 FY24, the management guided revenue to grow between 4–6%, while their total Cloud revenue is expected to grow 22-24%. At the same time, the management has guided non-GAAP Earnings-per-share (EPS) at $1.62–$1.66, given a base tax rate of 19%. This would translate to a total revenue of approximately $53.25B in FY24, which would represent a 6.6% revenue growth rate. Meanwhile, non-GAAP EPS should grow slightly higher than the revenue growth rate of 9% to $5.6. Looking further ahead into FY26, I believe that Oracle should be able to reach its $65B revenue target should it continue its momentum in its OCI business in the Cloud Services segment as it wins larger customer deals, deepens its collaboration with Nvidia, and expands its customer base to sovereign nations as it grows at an annual rate of 10% over the next 2 years. During this period of time, I believe that as Oracle unlocks economies of scale, it will be able to streamline its operating expenses to boost its efficiency and maintain its robust non-GAAP operating margin at 45%. This would translate to a non-GAAP operating income of $29B in FY26, which would be equivalent to a present value of $24B, when discounted at 10%. Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe that Oracle should trade at least 1.25x the multiple, given its rate of earnings growth during this period of time. This would translate to a PE ratio of at least 19, assuming the lower bound of the S&P 500 range, resulting in a price target of $163, which represents an upside of 38% from its current levels, making it a “buy”. Author's Valuation Model Conclusions  With the momentum in its OCI business, I am optimistic about Oracle reaching and possibly even overachieving its FY26 revenue target of $65B as it continues to build data centers to increase capacity, forging strategic relationships with Nvidia, winning large customer deals, and expanding its customer base to sovereign entities. While competition from larger hyperscalers remains a concern, I believe that Oracle is well positioned to deliver over the next couple of years as it maintains robust profit margins. Given the risk-reward, I believe that the stock is attractively priced to drive sizable returns in investment portfolios of 38%, making it a “buy”.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428566161"}