Episode 31 | Oracle's Position in the Software Industry

In Episode 31 of “Market News with Rodney Lake,” Rodney Lake, Director of the GW Investment Institute, covers Oracle’s ambitious push into the cloud, positioning itself as a top contender alongside Amazon, Microsoft, and Google. Despite slower growth than its competitors, Oracle's strategic pricing and strong margins make it a notable player in the software industry. The episode also delves into the company’s financial performance, including $54 billion in revenue, 70% gross margins, 22% net margins, and $88 billion in debt. Oracle’s founder, Larry Ellison, now chairman and chief technology officer, and Safra Catz, current CEO, lead the business with a sense of urgency towards technological innovation.  As Oracle pursues cloud and AI growth, the episode evaluates its market position, valuation, and future potential for investors.

Transcript

Rodney Lake
Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to “Market News at Rodney Lake.” I'm your host, Rodney Lake. We are coming to you from the GW School of Business here in Duques Hall in Washington, D.C..

Hello, everyone, and thanks for watching and thanks for coming back if you're an existing viewer or listener. Today we're going to be talking about a company, the company's Oracle. It's a position and a couple of our funds for the GW Investment Institute. And if you've been watching and paying attention, we're going to go through the company using the framework: business, management, price valuation, and balance sheet.

Now we rate those 25% each. Remember not investment advice, entertainment and informational purposes only here. So let's talk about Oracle. Many of you probably have heard of Oracle. And if you're a business person maybe you've interacted with Oracle. There's not a lot of really consumer-facing products with this company for individual consumers. It's really more of a business-to-business type of operation.

But it supplies software, enterprise software. If you've had sort of a big system, the enterprise system at your job that you've had to interact with, Oracle would be one of those things, you know, the relational databases. And really, this is, you know, one of the foundational pieces from, let's say, tens of years ago that that people have been using on the enterprise side and now you're seeing other products come in. 

So on the business side, you know, Oracle has been early to the game. Larry Ellison, founder of this company, and currently still the chairman and a big shareholder and we'll talk about that. You know, early days into the tech world as far as, you know, Apple and Oracle and Microsoft, as an example.

And they're really, again, on the enterprise system. So it's a good business. And it's been a great business for them. And however now, you know, things are changing. There's definitely a lot more competition in their space for the enterprise world. So for businesses, to do all of their accounting, to track all of their, you know, personnel management, everything to do with, like, how you would run a business and all the information that you need to take care of.

You know, Oracle is in the business of helping companies manage all that information, keep it safe and secure. And, and really now is moving into the cloud world as well. And if you've been watching on the business side, we've been listening. You know, Oracle's offering, new customers right now. We're in the early part of 2025, in January or February, early February here.

And they're offering customers, you know, half price, you know, 50% off on getting them to move to their cloud. So they're being very aggressive in this world. And lots of people are moving to cloud. And we've talked about, for example, Microsoft in the past about how aggressive they've been and how successful they have been on the cloud and Google as examples.

But Oracle is right there when you talk about the big players right now in cloud, you have to mention Oracle, as sort of part of that crew. Now they haven't had as much success as Amazon, Microsoft, and Google in the cloud. But you would probably put them fourth right now in that in that list and say they're having success and they're definitely now being far more aggressive on getting that business.

And so it is a good business, let's say, that way. But it is an old business for the most part. But they are absolutely working to transition a business into something a bit newer. So let's talk about, on the business side, what's the revenue look like for Oracle? So you're talking about revenue of $54 billion.

But let's get let's do the market cap $470 billion right now. And so, do a data check here on on the market cap. So market cap again, $470 billion. So this is a big business, right? This is not an a small business. This is not a small company. You're talking about one of the larger companies in the industry.

Now let's start going over, you know. Well, what's the you know, what's the business look like on the revenue side? The revenue 54, you know, 0.9. So basically 55 billion through 11/30, 2024 of last year. So again, these are big numbers. It's growing pretty slowly though. So, more modest growth over the last couple of years, 6%, 6.4%.

But you're looking at gross margins of 70%. That is very high. When we've talked about other companies. The only other companies, right, you know, sort of in the in the high gross margins are other software companies. And so when you think about, you know, possibly, with the high prices being charged, you talked about Nvidia, but you also talk about visa, which we've talked about before.

So these are super high margins and are not enjoyed by everyone. Certainly. Not across industries. This is really more of a software type of business margin. And and that's what Oracle enjoys. And when you look down to the net margins you're talking 22% so far more, you know, modest let's say, margins versus a Visa, for example, on the net, which the net margins of Visa or something like 55%.

Oracle, you know, right around, 20%, they're projected to have their margins go up and part of that is because the mix of their businesses. It looks like if they're adding cloud customers, that's a high margin business, especially the incremental customers. If you have that infrastructure build, that's higher margin business that they're potentially adding. And so you could see that there, you know, margin might be going up over time.

And we'll talk about that as we talk. Their net margins can go up over time. And as we talk about what's happening, with respect to their valuation. But again, you know, this is a very large business. It's been, you know, around for decades. It is definitely a business-to-business player. It has been for a long time.

And they're doing generally well and they're certainly being more aggressive, on the business side. So you would probably rate this business if you just look at sort of where they've been, where they are, the margins that they're charging, the growth that they're having in the cloud is more like a 6 or 7 right now. There's certainly not have not been as successful, in the cloud business as Amazon or Microsoft or even Google.

But definitely, again, they're in that fourth spot and coming on strong, very, significant part of their business and, and growing. Right. And so, that's super important. And, you know, something to think about as an investor is, okay, well, where, you know, this is a older line company, versus let's say Amazon, or Google. And those are not brand new companies either.

But, you know, certainly a little bit older than those companies. But, you know, very more of a contemporary of Microsoft. But Microsoft got to the cloud game, you know, I would say more aggressively than than Oracle did. So you would put them ahead, in that race. But Oracle again, is making strides. So business I would say kind of 6 or 7.

Now let's jump into the management. So one of the, you know, pioneers, let's say in the in the early tech world, you're talking about Steve Jobs, you're talking about Bill Gates and Larry Ellison. You would put right in there with with this crew is, you know, an emerging, figure at that time, running Oracle and, you know, but he's still there.

He's still active at the company. He's still the chairman of the company. He's still there, chief technology officer and founder, and he owns, you know, 41% of the company. And so when you talk about, you know, a founder-led company, he's no longer the CEO. The day-to-day CEO is Safra Catz. And Safra has been there also a very long time at the company and was co-CEO at one point and then in 2019 became the standalone CEO.

So you really have a steady group running this business. People that have been there a long time. Ellison again, remains the chairman of the company, remains the chief technology officer. And I mean, remains the single largest shareholder at around 40%, of the company. And so when you talk about, almost 41%, as of the last reporting here.

And so, you know, still owns a huge slug of, of, of a massively public company, obviously makes him a very wealthy person just on that. But, you know, you would say, okay, our incentives are aligned with the management team. Because, you know, such a huge portion of his, you know, personal net worth is, is, you know, Oracle stock and so on on the management side, as far as alignment goes, you would say that's very high.

As far as the, you know, people that have the institutional knowledge of this business, you still have a co-founder that's the chief technology officer and chairman of the company. So you would give high praise there if you thought they were doing a job. And I think Ellison is doing a good job.

And Safra Catz, I think is doing a good job. Maybe part of the, you know, criticism or feedback that you would give the management team as an investor if you had a meeting with them, would be saying, you know, how can you be even more aggressive in competing in these new categories like cloud? And what else is there?

Obviously, part of what they're doing, they're trying to be very aggressive. And you heard the announcements possibly around the AI world and this Stargate, you know, initiative from the Trump administration, which they were included in in on that. So they're definitely being more aggressive. And I would, you know, encourage them if you have this conversation with Safra Catz and Ellison, that, you know, to triple down, to quadruple down on this initiative that they're already in.

And so clearly they're thinking about this. So the management team seems to have a sense of urgency around AI, around cloud. And they're getting in these, you know, markets more aggressively, let's say, than it seems like they were probably two, and even one year ago. And so you would give them high praise for that. Now, again, they're not growing as much as some of these other businesses.

So that would be something that you would say, okay, as a management team, you need to be a lot more focused in on that. But they seem to be making progress. They seem to have the sense of urgency, in, you know, sense of opportunity that's present right now, that they're going after. And so you would give them high marks for that.

Again, you would give them high marks for the alignment of incentives because, particularly for Ellison, it is a very high stake in the company, 41% approximately. And Safra Catz has been there a long time. And so you would say, okay, well, these people have the institutional knowledge. They seem to have this sense of urgency around the business and growing the business, and particularly around cloud and AI right now and again, recently, mentioned in this initiative, around Stargate.

And so, you know, high marks for that. So I'd say 7 or 8 probably on the management team. Now let's get into the valuation side of this business. So when we talk about the valuation it's not certainly a cheap business when you you have 70% gross margins, you know, that you're going to probably pay up for that.

And the forward PE right now again, early February, you know, 28 times is the forward PE of certainly not cheap but not fully out line with the S&P. So you know and we'll get to the balance sheet here. And I think that's part of why you're getting a little bit of a ding on the valuation here. But you wouldn't call this excessively expensive.

You would probably say for a software company with 70% gross margins, you know, you would ask, well, you know, at that price, maybe the net margins are not quite as high as, as an Nvidia as a Visa, and they're not. So you're talking, you know, 20 plus, net net margins. So you would think that the market probably, you know, gives them a lower multiple.

And this is, you know, a little closer to in line with the S&P. And so you would say, well, on the valuation side, if you think the S&P is the average, you know, and that's a 5 or 6 that you would be right on top of. This would probably say that this is a better business than average and that this, you know, valuation, this metric, the price earnings multiple for Oracle is likely, you know, slightly better than average.

And so that's probably appropriate. And so you would probably give this then maybe a 6 or 7 on the valuation. So you're not saying like this is a tremendous, you know, buying opportunity at this price. You certainly wouldn't call it cheap, but you absolutely wouldn't say that this is a very expensive company. When you're talking about, you know, 28 times, you know, when you're talking, you know, Tesla line, you're talking Nvidia, you're talking much higher valuations, even for Visa as an example, even Costco, even Walmart at this point.

And so when you look at these valuations, you would say, okay, this is not a terrible valuation. This is not overly expensive. But, you know, what are the things that we need to be concerned about? And we're going to kind of, you know, go back through all of these to talk about, you know, how they they fit together.

But on the valuation side, I don't think it's overly expensive. Next up let's get into the balance sheet side here. So what are the why maybe this has this valuation. Well part of the reason could be that they have, you know, $88 billion of debt. Which sounds like a lot because it is for the company. And that that's not something that helps you sleep at night.

So when you think about other big tech companies that we've talked about before, when you talk about Microsoft, when you talk about Google or you talk about Apple, these are companies that have big net cash positions. And so, that they're in a big net debt. They have cash and cash equivalents of $11 billion, $88 billion. So you're talking, let's say $70 plus billion year of net debt on the balance sheet.

That does not help us, you know, sleep good at night. Right. And so why why, you know, they have all this, right? They have levered up to do acquisitions. Now, and we didn't talk about that, and we'll bring it back. You know they've been highly acquisitive company over the past. And they've been successful at doing that.

And so but what it has done is it's led to quite a lot of debt on the balance sheet. And if you look at the debt, it's it's certainly gone up, but it looks like it's peaked back in 2023 at 95 billion. And so the debt is coming down. And so when we talk about and this is why we want to talk, you know, through all the, the framework again is that on the management side, it does seem like that they're taking seriously the idea to reduce this debt.

So the cash and cash equivalence has come down, from a peak, a recent peak in 2021, where you are at $46 billion and $87 billion, then on the cash and the debt, respectively. And now you're at $11 billion and $88 billion, and the debt had actually gone up since then. So the metrics have, I would say deteriorated, you know, considerably, from the 2021 numbers where you're basically with the same debt and a lot less cash.

Now, the differences are, you know, again, acquisitions along the way. You know, and and Oracle has known and I think that is certainly part of their their business, setup. And when you're buying a company like Oracle, if you, you know, if you have shares of Oracle, if you are thinking about it, you know, some of the things that you have to think about on the business side and the management pieces, you know, it's a high acquisitive company and you have to think, you know, is management good at doing these, these acquisitions.

And that's part of that capital allocation. And if you go on to the blog, you can check that out. Have they been good allocators of capital? Well, generally speaking, yes. Not every single acquisition has worked. But when you connect to the balance sheet here, you definitely have a balance sheet that has quite a lot of debt on the balance sheet.

And it's not necessarily again, I think that's going to help us sleep at night. But when you talk about, okay, well, you know, what's the interest coverage ratio? So let's at least check out that metric. As far as you know, do we have some room here, some margin of error on that front? Well there's not a ton. You're talking about 4.4 times EBIT to total interest expense since that's called the times interest earned or the interest coverage ratio.

And so again, EBIT, earnings before interest and tax over interest expense. 4.4, that's not, you know, helping us sleep at night. You know, you definitely want to be, you know, in the ten area, plus. And ideally for a lot of the companies that we talk about and look at that are part of the GW Investment Institute portfolio, you really have a net cash position.

And so you're really not even thinking about the interest coverage ratio at all. And if they do have some, you know, modest, debt, you know, it, it's more than serviceable. And they have net cash and so 4.4 times is quite low. This is something that you should be concerned about as an analyst. It's definitely something that we're concerned about.

And again, this is part of the equation with Oracle on the business and the management side where management has been highly acquisitive over the life of Oracle. But they've been successful with that. They've been able to keep that gross margin up in the 70%, but their net margins at 22. Now as I mentioned, coming back to the you know, what's the projection here? As they get more aggressive in the cloud business, the business side of that may improve.

Now, they still then need to while we're talking about the balance sheet, they absolutely need to improve this metric on the balance sheet. As an investor, you could definitely be far more aggressive and likely they're going to get a higher multiple. So when you start to connect the dots here, you know, this is something that's a concern.

Why you possibly see this metric a little bit lower in the price earnings ratio in the valuation category is because again, you know, let's say some peers is because of this. Right. They're heavily levered. You think about a Microsoft as an example. You know they are not right. Net cash strength. You know if you had a market downturn of any kind you could absolutely see, you know, Amazon, Microsoft, you know, Google picking up market share, using their balance sheet as a source of strength to do that.

Oracle. Very challenging. If you had a massive downturn in the market or not even a massive, you had a significant downturn. You know, they already have, you know, 88 billion of debt. They only had the interest coverage ratio 4.4 times. That's not a great position for them to be in. So if they can continue to pay down that debt, improve the metrics associated with that, you know, get that to ten times, get that beyond that may, you know, at some point possibly get into a net cash position again.

That would be much better. And that's likely going to then demand much higher multiple. And so just on that piece. And then if you grow the net margin, and again, that would be through growing that cloud business because that's a high that's a high margin business, especially for the next customer because you're delivering, you know, on that, you know, you have all this operational leverage that you built this infrastructure, you can sell it, many times, you know, that that's a great business to be in.

That's a high margin business. And it's been a high margin business for Amazon and Microsoft and Google, and now again, Oracle. Now what's happening on the AI front? If they're leading on that, you know, maybe they're going to gain a lot of market share around that. So, you know going back through here again on the business side, you know, an older tech business for sure, as compared to a Google, however, has been thriving, has been very acquisitive again, still, you know, very relevant, in the market, very aggressive now from management on trying to get into a cloud business or try to get further traction, they're already in that business

Thinking about AI, a sense of urgency again. They're they're at least listed in the Stargate from the new administration. So on the business side, you know, I would say, you know, average to slightly better than average at this point, software business, 70% gross margins, you know, 20 couple percent net margins doing better.

The management team seems to be quite aggressive, into the AI space space. You know, Larry Ellison, Safra Catz doing a fantastic job. Right now, let's see if that continues. The valuation 28 times on the price earnings, for the forward PE, not fantastic, but certainly not a terrible. And I think part of the, you know, reason that that's a little bit lower than some of their, let's say, competitors, you certainly have lesser net margins than a Microsoft or a Visa even or Nvidia as examples that we've talked about.

But you know, more Microsoft as a comparison. And then on the balance sheet side, I think that's a real concern, something as an analyst, you have to think about, you know, $88 billion. You know, that's not a fantastic number for 70 billion market cap, you know 4.4 times interest covered ratio, EBIT, interest expense, something that you should be concerned about, something that doesn't help you sleep at night, you know.

Rodney Lake
But overall, depending on how you're scoring this company, you're probably putting it in the six or seven, seven and a half, depending on how you rate each one of those things. But to wrap up here, you know, Oracle, very solid business, sense sense of urgency from management, 70% gross margins, 22% net margins, management trying to, you know, gain market share in the cloud and really trying to position them for AI.

So big positives there. Larry Ellison still very much involved. Safra Catz 2019 CEO. I think they're doing a good job. On the valuation, kind of average valuation, you know, something to keep track of. And then when you look at the balance sheet, a source of concern. So you're really rating that, much lower, you know, five and possibly even lower maybe at three or four.

So again, overall, you're kind of in the 6 or 7 category. Not not fantastic. Something to watch. It's in our portfolio as an analyst you got to do your own work, as a reminder. And so again informational and entertainment purposes only. Thanks for watching this episode. We'll see you back on the next episode of “Market News with Rodney Lake.”

Rodney Lake

Disclaimer the content shared in the GW Investment Institute Podcast is for informational and educational purposes only, and should not be considered investment advice. The opinions expressed in this podcast are those of the host and guest, and do not necessarily reflect the views of the GW Investment Institute or the George Washington University. Listeners should not act upon the information provided without seeking professional advice from a qualified financial advisor. Investing involves risks including the loss of principal. The GW Investment Institute, the George Washington University, and the podcast hosts do not assume any responsibility for any investment decisions made based on the content of this podcast. Always conduct your own research and consult with a financial advisor before making any investment decisions.