Leading information technology and cloud services provider Oracle Corporation’s (ORCL - Get Rating) stock price has rallied 44.2% over the past year on the back of higher demand for its cloud ERP business and substantial IT spending globally. And because the tech giant has gradually transformed its business model to embrace cloud-based services like its peers Adobe, Inc. (ADBE), Autodesk, Inc. (ADSK), and Microsoft, Inc. (MSFT), we think ORCL is well positioned to take advantage of the booming cloud market.

The stock has gained 18.9% over the past month to close yesterday’s trading session at $78.75. In fact, it is trading just 1.8% below its 52-week high, which it hit on April 19.The  global cloud computing market size is projected to reach $1025.9 billion by 2026, exhibiting a CAGR of 18%. So, ORCL’s expanding cloud infrastructure services and new product launches should allow the stock to gain considerable traction in the coming months.

Click here to check out our Software Industry Report for 2021

Here is what we think could shape ORCL’s performance in the near term:

Expanding Cloud Portfolio

This month, ORCL and ServiceNow announced the integration of ITOM Visibility with Oracle Cloud Infrastructure (OCI) to enable customers to access and manage OCI resources and run their business-critical applications. This should allow ORCL to deliver a seamless experience to its customers by maximizing the value of cloud investments. In fact, last month, the company launched Oracle Cloud Lift Services to offer its global customer base expanded access to its cloud engineering solutions so they can smoothly shift their workloads to OCI. Because organizations are increasingly relying on cloud platforms to achieve cost efficiency and business continuity, these innovative cloud solutions and diverse cloud offerings should increase ORCL’s share in the global cloud market.

Favorable Analyst Estimates

A consensus EPS estimate of $1.03 for the quarter ending August 31, 2021 represents a 10.8% improvement year-over-year. Also, analysts expect the company’s revenue to increase 5.7% in the current quarter, 3.1% in fiscal 2021 and 2.7% in fiscal 2022.

Robust Financials and Profitability

ORCL’s cloud services and license support revenue increased 5% year-over-year to $7.25 billion in the fiscal third quarter, ended February 28, 2021. Its operating income grew 10% from the year-ago value to $3.88 billion, while its net income increased 95% year-over-year to $5.02 billion. The company’s EPS rose 112.7% from the prior-year quarter to $1.68.

ORCL’s trailing-12-month gross profit margin of 80.6% is 65.7% higher than the industry average 48.6%. Its trailing-12-month EBIT margin and net income margins of 38.8% and 32.3%, respectively, are significantly higher than industry averages of 7.3% and 4.5%. The company’s trailing-12-month ROE, ROA and ROTC of 110.9%, 10.9% and 13.1% compare favorably with respective industry averages.

POWR Ratings Indicate Solid Prospects

ORCL has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. ORCL has a Stability Grade of B, indicating that it is less than its peers.

Also, in terms of Quality Grade and Value Grade, ORCL has a B. The company’s higher profitability and relative undervaluation justify these grades. ORCL’s forward P/E of 17.59x is 32.4% lower than the industry average of 26.03x.

Click here to see the additional POWR Ratings for ORCL (Momentum, Sentiment, and Growth).

The stock is ranked #16 of 119 stocks in the D-rated Software – Application industry.

If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

The rising demand for cloud-based services has reinforced cloud adoption as the ‘new normal,’ as organizations seek  increased scalability, business continuity and cost efficiency. Because ORCL is investing heavily in its cloud infrastructure platform, it could soon be on  par with the other cloud leaders in the market. With its subscription revenue–driven by cloud ERP businesses–now accounting for 72% of its total revenues, ORCL is well positioned to outperform the broader market. Hence, we think the stock is an ideal investment proposition now.

Click here to check out our Software Industry Report for 2021

ORCL shares were trading at $78.90 per share on Tuesday afternoon, up $0.15 (+0.19%). Year-to-date, ORCL has gained 22.96%, versus a 10.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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