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Is Oracle's (ORCL) Cloud Strategy Headed the Right Direction?

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Oracle (ORCL - Free Report) is striving hard to strengthen its position in the lucrative cloud space.

Cloud space was booming even before the pandemic as enterprises were shifting their workloads to the cloud. Migration to the cloud offers enterprises increased scalability, faster deployment, cost efficiency, higher security and easy disaster recovery management. The pandemic only accelerated this shift.

The work from home, hybrid work model and lockdown restrictions have boosted demand for cloud-based video conferencing apps, gaming, online learning and e-commerce services, making it a new way of life. This is further driving the cloud market.

According to Fortune Business Insights, the worldwide cloud computing market is set to witness a CAGR of 17.9% between 2021 and 2028 and reach $791.48 billion by 2028. This opportunity bodes well for companies like Oracle that provide various cloud solutions and services.


Momentum in Cloud Offerings to Drive Top Line

Oracle’s top line is gaining from momentum across the cloud business, driven by the strong uptake of Oracle Cloud Infrastructure (OCI) services and Autonomous Database offerings. Healthy adoption of cloud-based applications, comprising NetSuite Enterprise Resource Planning (ERP), Fusion ERP and Fusion Human Capital Management (HCM), is another catalyst.

The company’s software as a service (SaaS), infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) products are likely to grow strongly over the next few years as enterprises rapidly migrate to the cloud environment.

For second-quarter fiscal 2022, management noted that the company’s IaaS and SaaS business increased 22% to $2.7 billion, respectively. Management stated that the company’s total cloud business revenues on an annualized basis totaled $10.7 billion, while the cloud bookings growth rate was faster than the cloud revenue growth rate.

In the last reported quarter, Oracle’s Cloud services and license support revenues (73% of total revenues) increased 6% year over year (up 6% at constant currency) to $7.554 billion. The upside can be attributed to continued strength in the Fusion, Autonomous Database and OCI services.

Revenues from Fusion ERP, Fusion HCM and NetSuite ERP were up 35%, 25% and 28%, respectively, in the fiscal second quarter.

Higher availability of Oracle cloud regions globally is expected to fortify its competitive position in the cloud computing domain.

Recently, Oracle unveiled one cloud region each in Italy and the Nordics as part of its strategy to expand its global cloud region footprint to 44 by 2022. With the opening of the Oracle Cloud Milan Region, Oracle now has 36 cloud regions globally. Prior to that, the company opened the Stockholm cloud region in the Nordics.

Recently, Oracle announced the takeover Cerner Corporation (CERN - Free Report) in an all-cash transaction amounting to $28.3 billion or $95 per share. Cerner specializes in providing digital information systems used within hospitals to facilitate medical professionals deliver better patient health outcomes. The acquisition will help Oracle to enhance its position in the healthcare technology space by combining healthcare data with its cloud services, noted CNBC.

Headwinds Persist

Escalating costs in the cloud platform amid intense competition in the cloud vertical from dominant players like Amazon’s (AMZN - Free Report) Amazon Web Services and Microsoft’s (MSFT - Free Report) Azure platform remain major concerns for Oracle.

Per a Statista report, Amazon accounted for 32% of the global cloud infrastructure services market, followed by Microsoft (21%) and Google Cloud (8%) in third-quarter 2021.

In the last reported quarter, Amazon’s AWS revenues (15% of total company sales) rose 39% year over year to $16.1 billion. Expanding AWS services portfolio is helping Amazon to maintain its dominance in the cloud domain by gaining more customers.

Microsoft’s performance is benefitting from strength in the Azure cloud platform amid the accelerated digital transformation taking place globally. Microsoft reported a 50% year-over-year (up 48% at constant currency) increase in Azure and other cloud services’ revenues in first-quarter fiscal 2022.

Also, high debt levels are a concern for Oracle. As of Nov 30, 2021, Oracle had cash & cash equivalents and marketable securities of $22.84 billion, while non-current notes payable and other borrowings stood at $73.43 billion.

Last week, Bloomberg reported that if Oracle amasses huge debt for the Cerner acquisition, it faces the risk of seeing its investment-grade ratings downgraded by all three major U.S. rating graders — S&P Global Ratings, Fitch Ratings and Moody’s Investors Service.

Although, at present, the company’s cloud business may not be relatively big, its strategy has the potential to pay off in the long term.

Currently, Oracle carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.