Oracle: More Tortoise than Hare

04/20/2016 8:00 am EST


Matthew Coffina

Editor, Morningstar Stock Investor

In Morningstar StockInvestor, analyst Matt Coffina maintains two portfolios — the Tortoise and the Hare. One stock recently transitioned from the higher risk portfolio to the more conservative model.

Oracle (ORCL) has matured and faced increased competition; as a result, the company’s growth profile has become decidedly more Tortoise than Hare.

Our investment thesis for Oracle revolves around its customer switching costs. Oracle was initially slow to respond to the threat posed by cloud computing.

Management appears to have underestimated the willingness of its large enterprise customers to transfer their important corporate data to the cloud, as well as the cost and flexibility benefits that come from renting rather than owning IT resources.

Fortunately, enterprise customers are also slow to adopt new technology, especially when it comes to critical systems such as databases and middleware.

That bought Oracle time to remake its entire software portfolio for the cloud. This was a multiyear effort, but we believe Oracle can now match the technological capabilities of its cloud-first competitors.

Oracle has a huge installed base of customers, and we think that it enjoys several advantages as it seeks to retain these customers and shift them to the Oracle cloud.

Large companies may use dozens or hundreds of databases and applications, with numerous interconnections between them.

Changing software vendors is both expensive and potentially very risky if it disrupts core business functions.

Oracle can also continue to support legacy on-premises deployments during the transition to the cloud — a process that may take as long as a decade for some larger enterprises.

Finally, Oracle should benefit from its ability to offer a complete application suite, along with databases and middleware, creating more opportunities for cross-selling and enabling its clients to work with fewer vendors.

As long as Oracle retains its customers — which we think it will — financial performance should improve going forward.

Oracle appears to be passing a key inflection point, where cloud growth will more than offset this headwind and enable a resumption of overall earnings growth. I still see it as one of the better opportunities for conservative investors.

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Matt Coffina, Analyst at Morningstar StockInvestor

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