Jun 2, 2021
[10 min Read]
Valuation: Slightly Overvalued
Oracle provides products and services that address enterprise information technology. These products and services include applications and infrastructure offerings through flexible IT deployment models, including on-premises, cloud, and hybrid models. Oracle offers and recommends these models to their corporate clients in order to meet their individual needs. These clients include businesses, educational institutions, government agencies, etc.
Oracle Cloud Software-as-a-service (SAAS) and Infrastructure-as-a-service (IAAS) provide an integrates stack of applications and infrastructure services to their customers via a cloud-based deployment model. Oracle's Cloud services integrate the hardware and software on behalf of their customer, and provide constantly is managing, upgrading, and supporting through the cloud. Their cloud services are quick to deploy, easily maintainable through cloud upgrades, connectable/interchangeable between IT environments, and cost-effective via low up-front costs and reliable usage.
Oracle has split their business into 3 segments in their SEC filings, which include:
In March of 2020, governments, businesses, and educational institutions recognized the severity of COVID-19. As a result of this, many of us were forced into lockdowns, and the ways in which we lived were changed for the meantime and remain changed to this date. One of the biggest changes that we were forced to adapt to is to work and study from home, in order to limit the spread of COVID-19. Here we are in June of 2021, over a year later, still working and studying from home (for the most part).
Many businesses were able to thrive in this “stay-at-home environment” such as Amazon, who saw revenues increase by over 37% between 2019 and 2020. However, Amazon (and ecommerce) is not the only business (industry) that has thrived due to the pandemic. Many SAAS companies were able to perform well over the pandemic and are expected to continue to grow after the pandemic due to the work-at-home environments created by the pandemic and expected to sustain even after the pandemic.
The COVID-19 pandemic has helped to prove to corporations that employees can work from home and do so in an efficient manner. As a result of society passing this work-from-home “test” more businesses are providing the option for their employees to work from home more often (or fully) even after the pandemic is over. Furthermore, we know that employees will be onboard with this change as 83% of workers have stated that they would prefer a “hybrid” work model post-pandemic, in which they can work from home 25%+ of the time.
SAAS businesses can thrive/profit off of this fact/expectation as SAAS solutions are easy to implement, are affordable, and can help to manage thee work-from-home environment. As a result of this, many research institutes have forecasted that the SAAS industry can grow at a CAGR of 11.2% over the next 5 years, and are expecting growth of 34.29% in this industry between 2021-2022.
Although, we have not seen this type of growth with Oracle, this industry trend is favourable and provides Oracle with an opportunity to capitalize on this growing space.
According to industry research the infrastructure-as-a-service industry is set to grow at a CAGR of 23.2% over the next 7 years. This is expected to happen due to the growing awareness of cloud services, growth in internet penetration in emerging economies, and the increasing demand for effective computing services.
Oracle is one company among many that are set to capitalize on this growing market/industry over the next 7 years and beyond. This gives Oracle a great opportunity to break their stagnancy and grow consistently over the course of the next decade.
As you can see in my comparable analyses (linked as an image below), there are 4 main competitors that operate in a similar manner to Oracle. These companies include Microsoft ($MSFT), Alphabet Inc. ($GOOG), Intel Corp. ($INTC), and SAP SE ($SAP). These companies were mentioned to be some of Oracles biggest competitors in their most recent SEC 10-K filing, this is because the IT landscape is very competitive, and their services compete directly with the services provided by each of their competitors listed above.
In order to find the WACC I used the information on Tracktak, which is a website that helps give information about DCF models and has their own DCF calculator. Tracktak estimated Oracle has a WACC of 6.46%.
I was also able to find the figure for the CAGR from Tracktak, in which they estimated that Oracle's CGAR was 15.04%.
Interest Expense Growth Rate:
I was able to fins the interest income growth rate through taking the average compound yearly growth in their interest expense over the past 10 years. By doing this I arrived at a figure of 7.99%.
I was able to find Oracles effective tax rate for the fiscal year 2020 through their SEC 10-K filing. In this filing they reported that their effective tax rate for 2020 was 16%.
Investment Valuation and Plan:
In order to value Oracle, I conducted a DCF model, and compared my results to those achieve through TrackTaks DCF to get an average DCF valuation.
Furthermore, I underwent 3 comparable analyses, in which I compared Oracles EV/EBITDA, EV/Revenue, and P/E ratios to that of their competitors. By doing this I got 3 different fair values, which I average in order to get one average comparable valuation.
I used the information found in the “valuation information” section of this report in order to undergo my DCF analysis. By doing this I arrived at a fair value per share of $54.09, or an implied downside of 31.31%. In order to verify this valuation, I decided to compare it to the DF model achieved by Tracktak.
I used tracktaks DCFF calculator in order to find Oracle's fair value. This website automatically populated a DCF model (image linked at the end of this article) and it arrived at a fair value per share of $66.32, or an implied downside of 15.77%. This supports the conclusion in my DCF model that Oracle is overvalued.
By averaging the 2 results from the aforementioned DCF models I arrived at a fair value of $60.21, which implies a downside of 23.53%. However, many SAAS businesses are overvalued, which speaks about how the market perceives value in these types of companies, so the more important valuation technique for this business would be their comparable analyses.
The EV/EBITDA multiple is commonly used when analyzing and valuing businesses. Oracles EV/EBITDA multiple is under their competitor's average, which hints to share price increase of 7.87%, or a share price of $84.95. This indicates that Oracle is undervalued, and contrasts the results achieved through the DCF models.
The EV/Revenue multiple is more commonly used to value businesses that have a history of acquisitions, and ais used to value businesses when looking to acquire them. By comparing Oracle's EV/Revenue multiple (6.58) to that of their competitor's average (6.82), we find that Oracle's fair value is at $81.59, which would imply a share price increase of 3.62%. This is similar to that of the EV/EBITDA comparable and signals that Oracle is undervalued.
The P/E multiple is extremely common in comparable analyses, and thus I used it for this valuation as well. The P/E comparable estimated that Oracle's fair value was at $103.66/share, which would imply a share price increase of 31.65%. This is the most optimistic comparable result out of the bunch but still signals that oracle is undervalued.
I took the average of all of the comparable analyses in order to get one valuation metric for the comparable analyses as a whole. This resulted in an overall fair value per share $90.07, which implies an upside of 14.38%.
By taking the average of my 2 analyses I arrive at a share price estimate of $75.14, which is very close to the average analyst price target of $75.30. As a result of this I would stay away from oracle's stock until it reaches fair value then I would consider buying and holding for the long term to take advantage of macroeconomic factors.