The wide-moat firm's limited capital expenditure profile gives us pause about the legitimacy of their public cloud offering for infrastructure-as-a-service.
By Rodney Nelson | 06-22-17 | 01:00 AM | Email Article

 Oracle  closed its fiscal 2017 on a high note as the company continues to execute on its transition to the cloud. Software-as-a-service revenue continues to grow at a meteoric pace, aided in part by the recent NetSuite acquisition. Still, Oracle’s limited capital expenditure profile gives us pause about the legitimacy of their public cloud offering for infrastructure-as-a-service, or IaaS. We are maintaining our wide economic moat rating, and after incorporating management’s guidance and a modestly lower tax rate, we are raising our fair value estimate to $46 per share, from $40 previously. Shares are rallying more than 10% on the back of these results, and we would wait for a better entry point before investing in the name.

Rodney Nelson is a senior equity analyst for Morningstar.

Fourth-quarter GAAP revenue rose 2% year over year to $37.7 billion, driven primarily by SaaS growth. SaaS revenue continues to grow at an elevated clip, rising 67% versus the prior-year period to $964 million. Although the contributions from SaaS remain relatively minimal compared with the broader Oracle business, we are encouraged to see this segment working to offset long-term declines in software license sales and, eventually, maintenance revenue from those licenses. Although we do not expect Oracle to return to the 40%-plus operating margins it once enjoyed as a solely on-premise vendor, the company saw minimal margin contraction in the fourth quarter (roughly 10 basis points).

Although Oracle has visions of competing with the likes of Amazon and Microsoft in IaaS, we have a hard time reconciling the firm’s modest capital investment profile that we deem a prerequisite for scaled competition. While these firms pour billions of dollars into building out global infrastructure, Oracle expects its total capital investments to shrink next year well below the $2.2 billion spent in fiscal 2017. We ultimately believe Oracle will struggle to compete effectively in this market, limiting the amount of revenue scale the firm can achieve.

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