What is the stock?
Oracle Corporation NYSE: ORCL
How long have you held the stock?
Oracle comprises 2.2% of the portfolio for the listed investment company, Templeton Global Growth Fund (ASX:TGG). We’ve held the stock for more than ten years, but added to the holding in late 2017.
What do you like about it?
Everyone knows Oracle as a database vendor, but the company has been going through a transition. It has moved from a significant upfront payment model, to a subscription-based recurring revenue model to generate strong and stable free cash flows (FCF), which will support returns to shareholders in the form of dividends and share buybacks. Oracle is currently returning 80-100% of FCF in dividends and buybacks.
How is it better than its competitors?
Oracle is competing for a bigger share of the pie, as the company is now also effectively selling hardware that runs the database, as well as the labour used to install, update and run the software, effectively expanding their addressable market.
Oracle’s core database business has a stable 43% market share and is here to stay. New technologies are a threat, but over the long term Oracle has won the battle given its advanced functionality, reliability and existing ecosystem. Product cycles are always a risk with technology companies, but Oracle has been the leading database provider through numerous technology evolutions. The mission-critical systems that its customers run on top of its database, make those customers risk averse in thinking about changing providers.
The stock’s valuation is at a sharp discount to some of the more fancied tech names such as the FAANGs (Facebook, Apple, Amazon, Netflix and Google parent Alphabet).
What do you like about its management?
The founder and largest shareholder, Larry Ellison (pictured with Arnold Schwarzenegger) is still involved in the company as chairman and chief technology officer. We view the recent long-term management targets with links to compensation as a positive for Oracle, as they steer the company in the right direction in terms of aligning management interests with shareholders’.
Where do you see value?
At US$46 the shares are down around 14% from its March highs and it is trading at around 14x earnings – where a fairer multiple would be in the high teens – Oracle still appears undervalued to us, especially in the context of an increasingly expensive technology sector.
Exposure to Oracle provides investors with access to a leading player in databases and enterprise applications, but also one that is successfully getting through a transitionary period and starting to deliver solid revenue growth, which is feeding through to the bottom line.
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