What a brutal six months it’s been for Oracle. The stock has dropped 30% and now trades at $121.73, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Oracle, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Oracle Not Exciting?
Even though the stock has become cheaper, we don’t have much confidence in Oracle. Here are three reasons you should be careful with ORCL, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Oracle grew its sales at a 10.7% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Oracle’s cash burn will increase. Their consensus estimates imply its free cash flow margin of negative 35.2% for the last 12 months will fall to negative 47.8%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Oracle burned through $23.69 billion of cash over the last year, and its $156.2 billion of debt exceeds the $31.89 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Oracle’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Oracle until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Oracle isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 4.1× forward price-to-sales (or $121.73 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than Oracle
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