Since the onset of the public health crisis last year, the work-and-learn-from-home culture has amplified society’s dependence on edge computing and cloud infrastructure. Pandemic-related shelter-in-place orders fueled the demand for remote project collaborations, video conferencing, online classes, gaming, and e-commerce shopping — all powered by cloud computing technology.

As a result, Oracle Corporation (ORCL) and SAP SE (SAP), two of the leading software-as-a-service (SaaS) providers, were the biggest gainers over the past year. While many expect things to revert to the old normal once COVID-19 is contained, the increased productivity of employees, as well as lower overhead costs for businesses, will likely keep the remote-working structure alive in the post-pandemic world.

The stocks of both companies have  generated decent returns over the past three years. While ORCL returned 34.3% over this period, SAP gained 22.7%. In terms of their past month’s performance, ORCL is a clear winner with 6.9% returns versus SAP’s 2.1% loss. But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements  

ORCL develops, hosts, and supports database and middleware software, application software, cloud infrastructure, hardware systems, and related services worldwide. It operates via four segments – cloud services and license support, cloud license and on-premises license, hardware, and services. The company currently  has 7,300 usion enterprise resource planning (ERP) customers and more than  23,000 NetSuite ERP (enterprise resource planning software) customers in the Oracle cloud.

To help organizations create dynamic and memorable experiences for their customers, ORCL recently added updates to Oracle Cloud Customer Experience (CX). The latest updates seek  to help organizations accelerate sales cycles, resolve customer service inquiries faster, and develop engaging loyalty programs that can grow customer lifetime value. Earlier this month, ORCL expanded its hybrid cloud portfolio with Oracle Roving Edge Infrastructure, a new offering that brings core infrastructure services to the edge with Roving Edge Devices (REDs).

SAP develops and provides analytics and application software for enterprises worldwide. It also provides software-related services. Roughly 77% of the world’s transaction revenue touches an SAP system. SAP’s forte is ERP. Companies of varying sizes in all sorts of niches use SAP’s software solutions to obtain insights and make prudent, well-informed decisions to  run as an intelligent enterprise.

SAP has been on an acquisition spree lately to deepen its footprint in the cloud enterprise business. Earlier this month, SAP acquired Finland-based non-coded development platform specialist AppGyver Oy to accelerate the migration of its  client’s enterprise applications to the cloud. SAP  has also entered a global partnership with integrated communications major, Lumen Technologies (LUMN). The deal will simplify cloud services for small- and medium-sized enterprises by integrating SAP HANA into the Lumen platform for businesses.

Recent Financial Results

In its fiscal second quarter, ended November 30, 2020, ORCL’s revenues were up 2% year-over-year to $9.8 billion. Cloud services and license support contributed 72% to its  top line, as segment revenues increased 4% to $7.1 billion. The company’s highly profitable multibillion-dollar Fusion and NetSuite Cloud ERP applications businesses grew revenue 33% and 21%, respectively, during the quarter. Its non-GAAP EPS came in at $1.06, rising 19% compared to the year-ago quarter.

SAP’s revenue for the fourth quarter, ended December 31, 2020, declined 2% year-over-year to $9 billion. Its current cloud backlog, a key indicator of go-to market success in cloud businesses, increased 14% year-over-year. In fact, its  cloud and software business segment contributed 87.3% to its  top line. Its non-IFRS EPS for the quarter came in at $2.02, declining  7% compared to the year-ago value.

Past and Expected Financial Performance

ORCL’s revenue and EPS grew at CAGRs of 0.5% and 12.7%, respectively, over the past three years. Also, the CAGR of the company’s free cash flow has been 5.1%.

The market expects ORCL’s revenue to increase 32.1% in the current quarter (ending February 28, 2021), 2.6% in the current year (ending May 31, 2021) and 2.5% next year. ORCL’s EPS is expected to grow 14.4% in the current quarter, 13.2% in the current year and 7.3% next year. Moreover, its EPS is expected to grow at a rate of 10.6% per annum over the next five years.

In comparison,  SAP’s revenue and EPS grew at CAGRs of 5.2% and 9.1%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 20%.

The market expects SAP’s revenue to increase 44.5% in the current quarter (ending March 31, 2021), decline 0.7% in the current year (ending December 31, 2021), but improve 3.8% next year. The company’s EPS is expected to rise 17.9% in the current quarter, decline 11.3% in the current year, but then increase 4.3% next year. Moreover, SAP’s EPS is expected to grow at a rate of 3% per annum over the next five years.

Profitability      

ORCL’s trailing-12-month revenue is nearly 1.18 times SAP’s.  In addition, , ORCL is more profitable, with a gross profit margin of 80.3% versus SAP’s 72.1%.

Also,  ORCL’s ROE and ROA of 83.7% and 9%, respectively, compare favorably with SAP’s 17.4% and 7.4%.

Valuation

In terms of forward p/e, SAP is currently trading at 29.13x, 52.8% more expensive than ORCL which is currently trading at 19.06x. However, both SAP and ORCL are almost at the same level in terms of trailing-12-month p/s (4.42x versus 5.03x).

In terms of trailing-12-month price/cash flow, SAP’s 16.94x is 24.8% higher than ORCL’s 13.60x.

ORCL looks much more affordable here.

POWR Ratings

While ORCL has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system, SAP has an overall rating of B, which translates a Buy.

Both ORCL and SAP have a Momentum Grade of B, in sync with their strong price performance. In terms of Stability Grade, both ORCL and SAP have a B grade, reflecting that they are less volatile compared to their industry peers.

However, SAP has a Growth Grade of D, which is consistent with its decline in earnings and revenues over the past year. Here, the expected increase in ORCL’s revenues and earnings this year is reflected in its Growth Grade of C.

Of 109 stocks in the Software – Application industry, ORCL is ranked #8 while SAP is ranked #16.

Beyond what I’ve stated above, our POWR Ratings system has also rated  ORCL and SAP for Value, Sentiment and Quality. Get all the ORCL ratings here. Also, Click here to see the additional POWR Ratings for SAP.

Click here to learn about other top-rated Software – Application stocks.

The Winner

Both ORCL and SAP are good long-term investments considering their market dominance and consistent innovations. However, ORCL appears to be a better buy based on the factors discussed here.

ORCL has opened 13 additional Cloud datacenter regions in 2020 and currently operates 29 regions globally – the fastest expansion by any major cloud provider. The company is constantly improving through investments in its products and customers to help it  deliver relevant services and build loyal customer relationships.

ORCL is focusing more on its already-aggressive expansion plan, and now expects to have 38 cloud regions live by mid-2021, with the recent opening of three new commercial cloud regions. In line with the improving prospects, we think ORCL will keep strengthening in coming quarters and the stock should witness further upside.

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ORCL shares were trading at $66.08 per share on Thursday afternoon, up $1.38 (+2.13%). Year-to-date, ORCL has gained 2.54%, versus a 3.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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