Oracle (NYSE:ORCL)’s Core Business Transition to Cloud Could Boost Its Profitability: RiverPark

In its Q1 Investor Letter, RiverPark discussed Oracle Corporation (NYSE:ORCL) as well as other companies. The fund believes that Oracle can boost its profitability by moving its core business to the Cloud. The investor thinks that the transition to the Cloud would “quickly make Oracle a major player in the cloud infrastructure market currently dominated by Amazon, Microsoft, and Alphabet (Google).” Let’s take a look at RiverPark’s thoughts on Oracle, a California-based engaged in developing database software and technology, cloud engineered systems and enterprise software products.

Oracle is one of the leading enterprise software vendors in the world and is in the midst of a transition of its core business to the Cloud, which, we believe, will significantly expand the company’s profitability as well as its addressable market. Microsoft, for instance, moved the vast majority of its Windows customers onto the Windows 365 subscription platform, which had two effects: it created a larger pool of growing and more consistent revenue, and it gave scale to Microsoft’s outsourced cloud provider (Azure) as its largest tenant. We believe Oracle has a similar if not bigger opportunity. We expect that the transition of existing clients of both Oracle’s database business (the best-selling database in the world by a factor of two) and its enterprise applications business (the largest and most comprehensive enterprise application offering in the world), to accelerate revenue growth and quickly make Oracle a major player in the cloud infrastructure market currently dominated by Amazon, Microsoft, and Alphabet (Google).

As has been the case with several other companies (such as one of our other core holdings, Adobe) that have transitioned their business models from licensed to software-as-a-service (SaaS) a period of tepid sales and profit growth often masks the underlying health of the company’s business. As the transition at Oracle matures, we believe subscription revenue will be 2.5-3x greater than the support revenue the company currently receives from existing clients and SaaS margins will match or exceed current margins. This transition should lead to 10%-15% long-term EPS growth for ORCL (up from the recent 5% per year rate). We believe that this bodes very well for the long term return potential for ORCL’s shares, which currently trade at a below market multiple.

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Oracle Corporation (NYSE:ORCL) is a popular stock among hedge funds covered by Insider Monkey. As of the end of 2017, there were 61 funds in our database with positions in the company including First Pacific Advisors, International Value Advisers, and Yacktman Asset Management.

On Monday, ORCL closed at $48.19. Its opening price on the last trading day was $48.15. The stock gained 7.45% over the past 12 months, while its year-to-date performance jumped 3.35%. Over the past six months, ORCL dropped 4.37%. The stock has a consensus average recommendation of ‘Overweight’ and a consensus average target price of $55.08, according to analysts polled by FactSet.