Oracle Corporation (ORCL)

Conclusion

Oracle Corporation sells enterprise software, including cloud applications and the Oracle Database, along with infrastructure technology and some hardware, mainly to businesses worldwide. At a price of 119.79 USD, the market capitalisation is 373.47 billion USD and the enterprise value is 492.32 billion USD.

The verdict is undervalued. Against their own ten-year medians, the price-to-earnings ratio of 19.7 sits below a median of 29.0, and the EV-to-EBITDA multiple of 13.1 sits below a median of 16.4. The fair value band runs from 134.38 to 201.57 USD with a midpoint of 167.98 USD, a margin of safety of 40.2% at the current price. The DCF per-share value is not available because free cash flow is negative, and the growth implied by the price is not available either. Revenue has grown at 10.7% a year over five years and earnings at 5.2% a year, while the estimate for next year's earnings growth is 35.7%.

The strongest numbers are the operating margin of 32.4%, the net margin of 26.4% and the five-year revenue growth of 10.7% a year. The weakest are the Altman Z-score of 1.51, which sits in the distress zone, free cash flow conversion of -151.8% over the last twelve months, and net debt to EBITDA of 3.15x.

Financial health

Financial health is red, held back by the Altman Z-score of 1.51, which sits in the distress zone. The Altman model was designed for manufacturers, so this reading is a rough guide for a software company. The current ratio of 1.17, the quick ratio of 1.02, net debt to EBITDA of 3.15x and interest coverage of 5.26x are all assessed neutral. Debt to equity is 2.34. Insolvency risk: low, about 0.9% by the estimate of the Ohlson model over one to two years. That estimate is a model output, not a forecast of default, and it sits uneasily beside the Altman reading. The leverage is material for a company whose free cash flow is negative, so the debt load depends on continued access to financing.

Earnings quality

Earnings quality is yellow. Free cash flow conversion is -151.8% over the last twelve months, against 2.2% a year on average over five years, which is the weakest reading in the analysis. Accruals are -6.9%, which is a favourable sign. Stock-based compensation equals 8.3% of revenue, and after it free cash flow is -34.69 billion USD. The share count has fallen at an annual rate of 0.7% over five years, which points to buybacks. The Piotroski score is 5 out of 9. The Beneish M-score is not available. Oracle beat earnings estimates in 5 of the last 8 quarters, with an average surprise of 9.4%. Estimate revisions are close to balanced: the current-year estimate moved by 1.3% over 90 days, with 6 upward and 6 downward revisions in the last 30 days.

Profitability

Profitability is green. The operating margin of 32.4% is close to its ten-year median of 32.1%, and the net margin of 26.4% is above its median of 23.4%. The gross margin of 64.0% is well below its median of 79.4%. Operating margin stability is 11.8%. ROIC of 12.6% against a WACC of 10.96% gives an ROIC minus WACC of 1.7%, assessed neutral. The five-year median ROIC is 13.7%. The return on equity of 28.3% relies heavily on leverage: the DuPont split shows a net margin of 25.4%, an asset turnover of 0.26 and an equity multiplier of 6.16.

Growth

Growth is green. Revenue has compounded at 10.5% over three years, 10.7% over five years and 6.2% over ten years. Earnings per share have compounded at 24.0% over three years, 5.2% over five years and 11.0% over ten years. Revenue grew in 8 of the 10 comparable years. The five-year earnings figure is well below the three-year one, so the recent acceleration has not yet shown up over a longer period. The estimate for next year's earnings growth is 35.7%, which is the main reason the growth outlook is assessed favourably.

Valuation

Valuation is green. The price-to-earnings ratio of 19.7 carries a premium of -31.9% against its ten-year median of 29.0. EV to EBITDA of 13.1 carries a premium of -20.4% against 16.4. Price to sales of 5.2 carries a premium of -9.5% against 5.7, and price to book of 5.6 carries a premium of -62.8% against 15.0. The fair value band runs from 134.38 to 201.57 USD with a midpoint of 167.98 USD, a margin of safety of 40.2% at a price of 119.79 USD. The DCF per-share value is not available, since it starts from negative free cash flow; its discount rate is 13.76% with 2.5% terminal growth. The fair value from historical multiples is 167.98 USD. The fair value is an order of magnitude built on fixed assumptions, including a 5% equity risk premium and capped growth, and is not a price target. The dividend yield is 1.6%, and a payout on free cash flow is not meaningful while free cash flow is negative.

Risks

The main risk is the balance sheet. An Altman Z-score of 1.51 in the distress zone, net debt of 3.15 times EBITDA and interest coverage of 5.26x leave little room if earnings fall, and a weak current ratio of 1.17 means short-term obligations are covered with limited slack. Negative free cash flow means the company depends on debt or equity markets while it funds its spending, and stock-based compensation of 8.3% of revenue reduces the cash left for shareholders. The reverse DCF growth, the DCF per-share value and the Beneish M-score are not available. The analysis has no debt maturity schedule and no revenue by segment, so refinancing timing and the contribution of each business line cannot be assessed.