Takeaways for Oracle investors: Cloud product growth is important
Oracle’s stock declines by 5% in reaction to disappointing earnings
Oracle (ORCL) continues to disappoint its investors, as its earnings came in below expectations for the second consecutive quarter. Its fiscal Q4 2014 revenues of $11.32 and non-GAAP EPS of $0.92 per share were both below analysts’ expectations. As a reaction, Oracle’s stock declined by more than 5% on the day of the earnings announcement. The main reason Oracle isn’t able to meet expectations is that its cloud-based products aren’t showing the fast growth that the overall cloud services market is experiencing.
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Oracle lags behind in the cloud infrastructure services market
As the chart above shows, Oracle’s cloud service products’ year-over-year growth rates have ranged between 7% and 22% in the last four quarters. However, according to a report from Synergy Research Group, the cloud infrastructure services market, which includes Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) components, grew at a rate of 50% in Q1 2014. Amazon (AMZN) leads this market, followed by Microsoft (MSFT), IBM (IBM), Salesforce.com (CRM), and Google (GOOGL). The more interesting consideration here is that the year-over-year growth rates for these companies have ranged between 37% and 154%, which is much more than Oracle’s growth rate.
Oracle’s optimistic about its prospects in the cloud services market
Despite the lower growth rates achieved by its cloud based products, Oracle remains optimistic. Oracle believes that it has a complete portfolio of SaaS-based products in the HCM, CRM, and ERP markets, and that it has more cloud solutions than Salesforce.com, WorkDay (WDAY), and SAP (SAP) combined. Another reason Oracle thinks it can become a bigger player in the cloud services market is that its cloud-based products run on its database, which is the world’s most popular database, and use its own popular programming language, Java.
Oracle is a dominant player in the database software market and claims that a number of cloud companies, such as Salesforce.com and SAP, are partnering with it so as to deploy their applications on Oracle’s latest database version 12C. The company is betting on two of the most attractive features of its database—the in-memory and multi-tenant features. However, Microsoft has also shown signs of growth in the database market, so it will be an interesting battle between these two giants in the database software market.
If Oracle does well in the cloud services market, it would benefit the iShares S&P North American Technology-Software Index Fund (IGV), VanEck Vectors Wide Moat ETF (MOAT), and iShares Dow Jones US Technology ETF (IYW). These are some of the ETFs that have high exposure to Oracle.