escape to quality
The stock market ‘tech wreck’ of 2022 has changed the strategies of many investors. In last year’s zero-interest-rate environment, when money was plentiful and cheap, it seemed like anyone with an idea could start a company. Take your company public and watch yourself get rich (it often didn’t matter if the company made money or not).
Oh how things have changed. In 2023, when it comes to equity investing, a major investor theme seems to be a return to basics. The days of exalted, loss-making companies are long gone. Today investors want to know if the companies they invest in are solid, stable and profitable.
So today we’re going to look at stocks that have a strong track record of delivering value and executing on their plans. Ruthless Efficiency: Oracle Corporation (New York Stock Exchange: ORCL).
Founded by Larry Ellison in 1977, Oracle Corporation is a giant in the world of enterprise software. The company operates in his three segments, with the majority of revenue coming from the company’s Cloud & Licensing business unit, followed by Services and Hardware.
The Cloud & Licensing unit serves customers through cloud and on-premises deployments. Services primarily come in the form of customer support and consulting to help customers get the most out of her Oracle platform, while hardware primarily consists of servers and data storage. (This is, of course, a high-level overview; each business unit is much more complex than what is covered here.)
At a beta value of exactly 1, Oracle’s stock price is highly correlated with the overall market. However, in the last few months, this seems to have changed.
After a brief rally in late 2021 followed by a price drop, Oracle’s stock has moved away from the S&P 500 (SP500) again in the past four months. The big question for investors and those looking to start investing is why the company has moved away from its historic relationship with the broader index, and if it is likely to continue. That’s it.
We believe the reason for exiting this market has a lot to do with Oracle’s near-term earnings prospects. Across the S&P 500, companies saw significantly reduced revenue and profit estimates.
Meanwhile, Oracle confirms that analysts’ average estimates of earnings are fairly stable.
In the chart above, we can see that the analyst’s average earnings forecast for fiscal year 2024 is only stabilizing rather than declining. In today’s environment of declining expectations, leveling things up is a win.
Of course, revenue is just one factor. Controlling costs and generating cash flow is the real key. Oracle shines in this area as well.
Oracle’s two-year (blue line) and three-year (red line) operating cash flow forecasts are steadily rising. We believe this is a testament to the nature of Oracle’s business. With interest rates rising and businesses looking for ways to cut costs, it’s clear that they feel they can’t afford the types of services Oracle offers.
As with previous hype cycles around blockchain and the metaverse, we are now looking at technology without gaining perspective on how companies are adapting (or failing) to the steady rise of artificial intelligence. It is difficult to read articles related to
But for Oracle, we think the AI opportunity case may have more substance than hype.
AI is a business that requires an incredibly large amount of data. For example, it takes a lot of computing power and very specific expertise to facilitate all the backend training and machine learning required to create a program like ChatGPT.
On the company’s final earnings call, Larry Ellison shared an exciting and important insight into the company’s AI capabilities, saying that the existing cluster scale of Oracle’s Gen 2 cloud will help solve complex AI problems more efficiently. provided.
To this end, Ellison states:
We believe our platform can do AI very well because we created a cluster of GPUs that can tackle big problems very quickly. We do it economically and build applications on top of it. We serve many startups in the world of AI. This is just one example of how they are far superior to other hyperscalers in terms of their ability to run networks and AI.
While it may be difficult to estimate the full market potential of AI and its overall impact today, we feel that the addressable market is clearly large. In such an environment, the company’s upfront gains may prove profitable in the future.
In our opinion, Oracle Corporation is a strong and established company with a long and successful business track record. The company’s leadership has been flexible over the years and ready to move on to new ideas, as evidenced by its rapid expansion into backing AI ventures.
For this reason, we believe the recent market detachment may represent a significant shift in how the market views Oracle’s stock. We believe investors should keep an eye on Oracle.