The wide-moat company's third-quarter results were lifted by strength in its cloud business.
By Rodney Nelson | 03-15-17 | 09:20 PM | Email Article

 Oracle’s third-quarter results were buoyed by across-the-board strength in the firm’s cloud businesses. SaaS and PaaS continue to see strong adoption, and early returns on the firm’s revamped IaaS look promising, though we continue to have questions about the long-term addressable opportunity for the IaaS business in the face of more advanced offerings from Amazon, Google, and Microsoft. We are maintaining our wide economic moat rating, and we are lifting our fair value estimate to $40 per share from $38 previously as we account for time value of money. Shares continue to look fully valued, and we think there are better investment opportunities in other wide moat names, including Salesforce.com and Guidewire.

Rodney Nelson is an equity analyst for Morningstar.

Third-quarter non-GAAP revenue rose 3% to $9.3 billion, driven by 85% growth in Oracle’s SaaS and PaaS revenue. The company continues to onboard a substantial number of cloud ERP and CX customers as 1,125 SaaS customers signed on in the quarter, Oracle’s largest total since fourth-quarter 2015. Oracle continues to strike a solid balance between its cloud and legacy on-premises business, and management expressed confidence that the cloud business would more than offset declines in the legacy business, yielding a consistent upward inflection in the broader business model. We believe our expectations capture this phenomenon, as we model 5% compounded annual revenue growth over the course of our five-year explicit forecast.

Oracle’s IaaS business experienced its first meaningful growth since first-quarter 2016, rising 17% versus the prior-year period to $178 million as the company rolls out its new offering. Management expects broad adoption of the service, with Oracle founder Larry Ellison maintaining that IaaS will be Oracle’s largest cloud revenue contributor when all is said and done. Meanwhile, co-CEO Safra Catz noted that Oracle should return to consistent top-line growth against stringent cost controls that should yield material operating leverage.

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