Yesterday, technology giant Oracle Corp (NYSE: ORCL) announced its fiscal fourth quarter of 2021 earnings ended in May and reported sales of $11.2 billion with earnings of $1.54 per share. Comparatively, Wall Street expected the company to report revenue of $11.04 billion and earnings of $1.31 in Q4. While sales rose 8%, adjusted earnings were up over 30% year over year in Q4.
Despite this earnings and revenue beat, Oracle stock is trading 5% lower in early market trading today, possibly due to profit booking.
ORCL stock outperforms S&P 500
Shares of Oracle gained close to 27% in the first five and a half months of CY 2021, compared to the S&P 500 which is up 14%. In the last year, ORCL stock has returned 56% while the S&P 500 is up 41%. Oracle has also outperformed the S&P 500 index in the last five-year period rising 130.4% compared to the 125% gains of the latter.
Oracle provides products and services that address enterprise information technology environments at the global level. Its cloud SaaS (software-as-a-service) offering includes multiple applications that include the Oracle ERP (enterprise resource planning) cloud, Oracle enterprise, and performance management cloud. The company offers cloud-based solutions for various industries.
In Q4, its Cloud services and license support sales grew 8% to $7.4 billion while Cloud license and on-premise license sales were up 9% at $2.1 billion. In fiscal 2021 total sales surged 4% higher year over year to $40.5 billion while adjusted operating income was up 9% at $19 billion, indicating a margin of 47%.
In the last decade, Oracle has faced a few challenges as demand for its on-premise enterprise products has been lukewarm due to saturation in key markets as well as rising competition from several cloud-based services.
However, it has successfully expanded its cloud revenue to offset the decline in legacy businesses focusing primarily on database and enterprise software markets. Oracle’s acquisition of NetSuite in 2016 has allowed its business to stage a turnaround thereby contributing to its outperformance in the last few years.
What next for investors?
Oracle’s top-line in 2020 fell 1% but adjusted earnings rose 9%. In fiscal 2021, demand from its cloud services that include Fusion and NetSuite ERP allowed it to offset the impact of COVID-19 on its legacy on-premise software business.
The company buybacks its outstanding stock which allows it to boost EPS consistently. In the last five years, its share count has fallen by 16% while in the last decade outstanding shares are down by 42%. It is another reason why ORCL stock has a dividend yield of less than 1.7% as it allocates a majority of its free cash flow on buybacks.
Despite shifting its focus towards the cloud, Oracle has been able to improve its operating margin in the last year. The company’s adjusted operating margin stood at 44% in fiscal 2019 and fiscal 2020. However, as seen above, its margin widened to 47% in 2021. This indicates that Oracle is not burning cash while accelerating cloud sales and continues to enjoy pricing power in its legacy businesses.
Analysts covering ORCL stock expect it to increase sales by 2.2% to $41.4 billion in fiscal 2022 and by 3% to $42.16 billion in 2023. The tech giant is also forecast to increase earnings at an annual rate of 12% in the next five years. Oracle is trading at a forward price to earnings multiple of 16.2x making it one of the cheapest tech stocks on the S&P 500.
The final takeaway
Oracle remains a quality blue-chip company that should deliver consistent returns. While its dividends have not increased in the last two years, ORCL has a low payout ratio of just 28% giving it enough room to increase it going forward. In the last year, it has generated over $12.5 billion in free cash flow and ended fiscal 2021 with a cash balance of $30 billion and $16.5 billion in marketable securities.
Oracle stock is trading at an attractive valuation and it has enough liquidity to deploy on dividends, buybacks as well as acquisitions and other investments.
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