Oracle’s transition to the cloud would likely enhance its growth potential

In fiscal 1Q18, Oracle’s (ORCL) total cloud revenues rose 51.4% to $1.5 billion, with an annual run rate of $6 billion. In fiscal 2017, Oracle’s cloud business generated revenues of ~$4.6 billion, compared with $2.9 billion in fiscal 2016. Overall, its cloud revenues contribute 16% to overall revenues.

Its better-than-expected fiscal 1Q18 earnings pushed Oracle stock initially, but then it fell close to 7% due to indications of slower growth in Oracle’s cloud and overall revenues.

Could Cloud Keep Dominating Oracle’s Fiscal 2Q18 Results?

Oracle, a prominent player in the enterprise software space, is now making an aggressive push in the cloud space, and this transition should enable Oracle to address a larger TAM (total addressable market), which could boost its growth potential. Moreover, SaaS (software-as-a-service) and cloud revenues are viewed as more predictable than licensing revenues.

Spending on SaaS is also relatively small compared with on-premise enterprise software spending. This is why it’s expected that SaaS growth will remain strong for many years. According to Synergy Research forecasts, the SaaS market is estimated to double in size over the next three years. In calendar 2Q17, it was estimated at $15 billion.

Oracle’s steady growth in the cloud

Like IBM (IBM) Oracle has struggled to report revenue growth. However, the situation seems to have improved for Oracle. The company posted single-digit revenue growth not only in fiscal 1Q18 but also in fiscal 2017.

The huge growth expected in the cloud space has attracted various software players to it. However, this continues to be a consolidated space, wherein only a few players—namely Amazon.com (AMZN), Microsoft (MSFT), and Google—control more than half of the cloud space.

But Oracle has now made it to the top eight players in the cloud space, according to Synergy Research. This could help explain why market and industry analysts are so interested in Oracle’s cloud revenues.

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