Oracle Corporation (NYSE:ORCL) Cloud Services Are Driving Its Growth
Oracle Corporation (NYSE:ORCL) recently announced its first quarter results for fiscal 2018 where its cloud services revenues grew by about 51% on a year-to-year basis. The cloud revenues beat analysts’ expectations and might be an indicator of better things to come for this technology giant whom most believed was a late entrant into the cloud services industry.
The growth in cloud services revenue was largely attributed to the growth of SaaS revenues, which accelerated by 61% on a y/y basis. However, the company’s stock price tumbled after it revealed rather soft earnings guidance, which was below most analysts’ expectations.
Oracle’s recent positive results are indicative of a recovery in a software giant that had been stagnant for several years in the past. However, the company faces stiff competition from companies such as Microsoft Corporation (NASDAQ:MSFT) and SAP SE (ADR) (NYSE:SAP), which have higher P/E ratios than Oracle’s.
The company is set to launch a new Database as a Service product that is powered by its cloud infrastructure, which will complement its existing on-premise ERP systems products. Oracle’s growth prospects are quite high given that the global cloud services market is growing at a fast pace and the company is well positioned to exploit this growing trend.
Oracle has reinvented itself as a cloud-focused software company as opposed to its previous focus on on-premise ERP systems. A major advantage associated with the company’s cloud services is the huge margins and profits associated with its SaaS offerings. Currently, the company reported gross margins of about 59% to 67% with the company predicting that its SaaS margins could hit 80% in the next two years.
The company has a strong balance sheet and the high margins associated with the shift to cloud services are likely to result in higher free cash flow figures. This means that the company is in a position to pay higher dividends to shareholders as well as to invest in share buyback programs.
Other growth opportunities for the company lie in its Platform as a Service (PaaS) offerings and its Infrastructure as a Service (IaaS) offerings, which are all reporting double-digit growth. Other revenue streams for the company include software license updates and product support revenues all of which are reporting growth.
The question remains whether Oracle is a good long-term investment for growth and dividend investors.
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