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Stock Strategist

Oracle Is Undervalued

The cloud picture isn't completely clear, but that's OK.


 Oracle's (ORCL) fiscal first-quarter results provided more hope than evidence regarding the firm's success in the cloud, but given the relatively favorable valuation and tepid expectations for this legacy software provider, we believe the shares are currently undervalued. While we aren't fully embracing management's bold claims about its dominance in either cloud applications (software as a service) or platforms (platform as a service), customer switching costs do provide a strong foundation for the firm's wide economic moat. We are sticking with our wide moat rating and $44 fair value estimate.

Currency effects masked the underlying resilience of Oracle's core business, as revenue increased 7% on a constant currency basis, despite declining 2% on an as-reported basis. Cloud revenue came in at $611 million, or 9% of the software total, growing nearly 30% versus the prior year. Maintenance revenue, representing 73% of software revenue, also grew a strong 8% on a constant currency basis. In isolation, the results in the cloud business are encouraging; still, new cloud revenue is probably cannibalizing traditional on-premises opportunities. The blended growth rate is more representative of the strength in Oracle's business, and we are not overly ebullient about the company's growth trajectory.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.