Oracle Stock Jumps as Investors Take a New Look at Its Cloud Story

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  • Oracle shares had their best day in almost a year after an article pointed to the company's opportunities in cloud computing.
  • A re-rating could happen in the style of Microsoft, but the company hasn't shown major progress.

The week got off to an uneventful start on Monday, with major tech stocks taking a breather. But Oracle shares had their best day in almost a year, rising 5% following the publication late Friday of a Barron's cover story about the cloud prospects of 43-year-old software and hardware maker.

The thesis is that Oracle could be the next longstanding technology company to transform like Adobe, Autodesk and Microsoft, which changed up their business models to embrace cloud-based services over traditional licensed software, and saw their stocks rise as a result. The article suggests that Oracle could pick up gains in cloud computing, both by providing cloud software for clients to use and by operating cloud infrastructure that companies can rely on to run their own applications.

But today, it's hard to know just how large these businesses are inside Oracle, which still derives much of its revenue from licenses for longstanding products such as database software and middleware. The company stopped disclosing revenue and operating expenses from cloud applications and cloud infrastructure and platform as a service in 2018.

In the most recent quarter Oracle's overall revenue grew 1.9% from a year ago. That's a lot slower than the cloud computing industry is growing -- technology industry research company Gartner estimated that the market grew 37% in 2019 (numbers for 2020 aren't available yet).

Oracle has picked up cloud infrastructure business from companies that have seen greater demand during the coronavirus pandemic, including video-calling software maker Zoom. But it has not become a leader in that market in the same way that it dominates in databases.

Oracle held less than 3% of the public cloud services market in the first half of 2020, while Amazon and Microsoft each had around 13%, according to estimates from technology research company IDC. That category includes cloud software, as well as infrastructure and platform as a service.

Oracle's depth of commitment to the cloud space is also hard to see from the company's spending. While the top cloud-infrastructure providers have routinely spent billions on data center infrastructure each quarter, Oracle reported $536 million in capital expenditures in its most recent quarter, which ended Nov. 30. In the fourth quarter Microsoft's capital expenditures were 10 times that, at $5.4 billion.

Last month Goldman Sachs initiated coverage of Oracle with a sell rating. Analysts at the bank pointed to a loss in cloud application market share. "Oracle does not seem to have meaningful exposure to new apps," they wrote. What would help, they wrote, is to gain visibility into growth rates for the cloud businesses.

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