Since introducing its first database software in 1979, Oracle (ORCL) has grown to become a global technology market leader with sales topping $39 billion, notes value-focused money manager Ingrid Hendershot, editor of Hendershot Investments.
To transition its business into the cloud, management plans to leverage its large operating scale, which includes a 50% share of the global database management market; its technology breadth, which stems, in part, from key acquisitions; and its large installed base of more than 430,000 worldwide customers.
To support its cloud transition and drive growth during the past five years, Oracle has invested nearly $30 billion, or 15% of its revenues, in research and development.
Return on shareholders’ equity in fiscal 2019 was an outstanding 50%. These solid results were driven by the company’s high margin Fusion and NetSuite cloud applications businesses which continue to grow rapidly while Oracle downsizes their low-margin legacy hardware business.
Oracle is gaining market share in the cloud applications business. During the fourth quarter, the company added over 5,000 new Autonomous Database trials.
This new Gen2 Cloud Infrastructure offers a self-driving database that automatically encrypts all data, backs itself up, tunes itself, upgrades itself and patches itself when a security threat is detected all without the need of human intervention or downtime.
Oracle’s profitable operations generate strong cash flows. With minimal capital expenditure needs, Oracle’s free cash flow has significantly exceeded net income over the years, a sign of high-quality earnings.
During the year, Oracle repurchased a whopping 734 million shares for a total of $36 billion. Between the share buyback and dividend, Oracle returned $39 billion to shareholders in fiscal 2019.
Oracle’s dividend currently yields 1.7%. With a relatively low 27% dividend payout, the company has ample room to increase the dividend steadily even while it transitions its business to the cloud.
Based on Oracle’s current market cap, the stock is attractively valued with a free cash flow yield of 7%. Long-term investors should add Oracle — a high quality technology leader with financial strength and an attractive valuation — to their database.
