With its $330 billion-plus valuation, Oracle Corp. is hardly small. But might it be a “mini Microsoft?”
Bernstein analyst Mark Moerdler is kicking that idea around, writing in a note to clients Wednesday that Oracle’s
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transition to the cloud harks back to when Microsoft Corp.
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went through a similar journey nearly a decade ago.
“There are certainly many differences … including those around competitive dynamics, product mix, etc.,” Moerdler wrote. “So while we are not ready to say, Oracle is the next Microsoft, Oracle’s present set-up does have some similarities that are worth noting, especially as investors consider the opportunity from here.”
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He noted that Microsoft’s 2015 transition to the cloud involved three pillars: moving Office to the cloud, tapping a “nascent growth opportunity” in the Azure cloud-computing business and heading to the bank with the “cash machine” of its Windows and Server & Tools businesses.
Oracle’s transition also has three components. The company is in the early days of migrating its enterprise resource planning (ERP) product to the cloud, is looking at big opportunity in its Oracle Cloud Infrastructure (OCI) Gen 2 offering and is sitting on a high-margin database business that’s growing slowly but making sizable contributions to the overall business.
“Both Microsoft in 2015 and Oracle today are delivering what are two of the highest operating margins in the industry,” Moerdler wrote. “In fact, Microsoft’s margins have improved since they hit their Cloud inflection moment and Oracle is calling for a near-term rebound in operating margins. One could argue that Oracle’s margins could in fact improve, similar to Microsoft’s (but not by as much) as the tailwinds continue.”
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There are also some cultural parallels, in Moerdler’s view. He said that Microsoft became more collaborative in 2015 under Chief Executive Satya Nadella as it started pushing more partnerships. Oracle seems to be playing more with others lately too, as evidenced by recent arrangements with Microsoft and Amazon.com Inc.
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“Further, we are also hearing that Oracle is shifting their customer engagement approach to a more partnership-focused engagement,” Moerdler said.
The two companies are “unique,” in his assessment, “with a significant mix of go-to-market/revenue generated via the partner network.” That’s a different approach than what other cloud businesses do in largely leveraging direct models.
He also acknowledged some differences between the two businesses. For one, Oracle co-founder Larry Ellison’s large stake in the company could provide more stability but also turn off some institutional investors with restrictions around concentrated ownership. And even during the early days of its cloud transition, Microsoft had greater investment flexibility than Oracle does now, thanks to its financial footprint.
Oracle shares have run up 50% so far this year, but Moerdler thinks the rally still has legs.
“Sentiments (and valuation) for Oracle have improved significantly and while some of it is the overall valuation lift across software, and the safety premium for Oracle’s business in a slowing IT spending environment,” he said, “we like the setup and the story and there is a real opportunity for sustained stock appreciation.”
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