Stock Market Ideas

#12 Oracle May Be An Undervalued IT Company And Has A Long History Of Profits

July 08, 2020 Ted Vailas Episode 12
Stock Market Ideas
#12 Oracle May Be An Undervalued IT Company And Has A Long History Of Profits
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Stock Market Ideas
#12 Oracle May Be An Undervalued IT Company And Has A Long History Of Profits
Jul 08, 2020 Episode 12
Ted Vailas

In this episode I talked about software pioneer Oracle. 

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Show Notes Transcript

In this episode I talked about software pioneer Oracle. 

Support the show (http://www.stockmarketideaspodcast.com)

Speaker 1:

This is episode 12. Today we are going to talk about Oracle corporation, ticker symbol, O R C L on the New York stock exchange. Let's get started.

Speaker 2:

Welcome to the stock market ideas podcast, where we discuss value investing and longterm investment ideas, make sure to subscribe and you'll get all of our most UpToDate episodes with investment ideas. You should be thinking about here's your host, Ted Phyliss . Thank you very much for joining me today. Again, for another episode of the stock market ideas podcast. Today, we're going to dive in

Speaker 1:

To Oracle corporation, which is in the enterprise. It space with , uh , database solutions , uh, applications, hardware , uh , the entire cloud computing solution. Now Oracle is a relatively old company in the it industry started by Larry Ellison and his partners. So it has a long history as a software company and as a big and growing player in the cloud space right now, the Oracle cloud infrastructure is its main product competing up against Amazon, AWS and Microsoft Azure. Just to name a couple, one of its most recent, very large clients has been with zoom because of its unprecedented growth with the move to work from home with COVID-19 zoom needed a solution that could suddenly support millions of users using it's very data rich video product. Now, if we're looking at recent analyst rating , a couple of highly rated analysts have recently given Oracle a buy rating, Heather Bellini at Goldman Sachs gives it a price target of $61. Brad Zelnick at credit Suisse has reiterated his buy rating on the company where he believes Oracle's results have held up fairly well. Recently. I also want to mention a recent article by Gary Alexander, who is a blogger at seeking alpha. Gary has a very good track record himself. If you follow him on tip rang and his article is quite positive. I encourage you to check out that article on seeking alpha. He also has a paid newsletter on seeking alpha. It's called daily tech download. I highly encourage you to take a look at that, especially if you're interested in technology companies. This writer has a very good track record with the articles that he's written. So it could be worth taking a look at this newsletter for a 14 day trial or just a one month trial, just to see if this information is useful to you. All right, let's get into a little bit of the fundamentals at Oracle that I find interesting right now, although this company does have quite a bit of a debt load above $71 billion or so it also holds a substantial amount of cash and has a long history of positive net income and positive free cash flows. This is not uncommon with technology companies that are highly profitable. So it's worth diving in and looking a little more at what the debt structure looks like. But I suspect that as we've seen with technology companies, debt is being used more to drive growth while maintaining strong profitability Oracle's gross profit margins are very consistent, just under 80%. This has been fairly consistent going back at least 10 years. The same goes for operating margins, which have been in the mid 30% range as well as net margins being fairly consistent in the 25% range. So at least for now, Oracle has not really been a growth company, especially within an industry that's growing so fast. And when you look at some of the large competitors that it's up against, perhaps they can create some new momentum, especially with their new large client zoom. But this lack of explosive growth that's almost expected in the technology sector is probably what's driving its current valuation and perhaps leading it to be undervalued depending on where you think this company can go in the future. So it's current price to earnings ratio is just above 18 and it has a forward PE of just over 14, which will depend on where you think future earnings will go. So if we just look at it's historic price to earnings ratio of around 19.3, it's slightly undervalued on that basis. And just looking at the Peter Lynch chart, which shows the price of a stock against its hypothetical price at a price to earnings of 15, and also the very similar chart, which blots the stock price against its average. PE you can see that the stock price tends to follow this chart fairly well. Going back at least 10 years. Just another point to make sure you factor into your analysis. If you're looking at this company, it does pay a dividend and has consistently done. So for at least 10 years, the current dividend yield is roughly 1.7% just to make sure you're factoring that in on top of the stock price appreciation that you might expect as a shareholder also notable for Oracle is that it has been doing a lot of share buybacks in recent years, especially within the last two years or so. The shares outstanding have dropped quite a bit. So this is seen generally as a good thing to shareholders with the stock price, not having advanced all that much over the past two years, perhaps this adds to any undervaluation that you feel this company might have at least on a per share basis. So overall Oracle is not without its challenges within a tough and very competitive space. This is an industry that is driven by innovation. So Oracle will have a lot of work to do to make sure it keeps up. But because we know that this company has a long history within the software industry, I would say it's definitely a high quality company. That's going to continue to find ways to bring value to its customers and to look for ways to grow its product offering. So while this company doesn't especially look completely undervalued compared to some other opportunities that you might find, it doesn't look any means to be overvalued. And if you think that Oracle can grow and to innovate well into the future, you could probably do a lot worse than to hold this company in your portfolio as a longterm investment. So as always, I hope you found this to be very interesting and useful, make sure to keep an eye out for the next episode, have a fantastic day. And we'll talk again. Bye for now

Speaker 2:

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