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Oracle Is Counting on Cloud Services to Drive Growth

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Oracle’s great expectations from cloud services

Earlier, we discussed analysts’ expectations for Oracle’s (ORCL) soon-to-be-announced fiscal 2Q16 results. Let’s see how the company’s ongoing transition towards the cloud has a considerable impact on its revenue growth. Though cloud revenues contributed only 7% to the company’s overall revenues in fiscal 1Q16, Oracle is taking aggressive steps to increase its contribution. As the cloud is a high growth business, Oracle allocates a higher proportion of its R&D (research and development) funds and S&M (sales and marketing) expenditures to cloud offerings than to legacy on-premise offerings.

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In fiscal 1Q16, Larry Ellison, Founder and Executive Chairman of Oracle, stated that the company expects SaaS (software-as-a-service) and PaaS (platform-as-a-service) revenues to grow by 36%–40% while IaaS (infrastructure-as-a-service) revenue is expected to grow in the range of 5%–9% in fiscal 2Q16. Oracle’s IaaS was released later than PaaS and SaaS. This is likely the reason for the expected single-digit growth rate for IaaS. Also, Oracle doesn’t separately report IaaS bookings growth, making it difficult to determine if IaaS will be on fast-track growth in the near future.

Oracle intends to overtake peers in the cloud

In its OpenWorld 2015 conference that was held from October 25–29, 2015, Oracle divulged its plans to enhance its portfolio in IaaS, cloud applications, analytical cloud services, and cloud integration services. By increasing its focus on IaaS, it appears that Oracle wants to lock horns with Amazon (AMZN), as Amazon Web services (or AWS) leads the IaaS and entire cloud space. In the past, Oracle’s management stated that the company intends to overtake Salesforce (CRM) in the Saas and Paas segments in fiscal 2016.

For Oracle, you could consider investing in the SPDR S&P 500 ETF (SPY) and the iShares US Technology ETF (IYW) as they have respective exposure of 8.4% and 45.2% to application software, and respectively invest 3.4% and 0.68% of their holdings in Oracle.

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