Oracle Corporation (ORCL)
Covering Analyst: Joshua Jordan
jjordan3@uoregon.edu
Oracle History
› Founded in 1977
– Larry Ellison, Bob Miner, and Ed Oates
› Incorporated in 1977
– A Series of Re-Incorporations
› Oracle Systems merged with Oracle Corporation
– June 1, 1995
› Many Acquisitions
Business Overview
› Software
› Americas (52%)
› Hardware
› EMEA (31%)
› Services
› Asia Pacific (17%)
Software Publishing Industry
› Low Concentration
› High Competition
Software Publishing Market Share
› Enterprise Software
Publishing Sub-segment
20.9%
– High Concentration
7.0%
Oracle
5.6%
IBM
66.5%
Total: $183 billion
Microsoft
Other
Software Business
› Software Licenses
– Database Software
› MySQL
– Middleware Software
› Fusion Middleware
– Business Intelligence, Cloud Application Foundation, Data Integration, Java
– Applications Software
› Fusion Applications, Siebel, JD Edwards
– Customer Relationship Management, Supply Chain Management, Financials
Hardware Business
› Hardware Systems Products
– Engineered Systems
› Exadata, Exalogic, SPARC SuperCluster
– Servers
› SPARC microprocessor
– Storage
› Sun ZFS Storage Appliance Network Attached Storage
– Operating Systems
› Oracle Solaris
Services
› Consulting
› Managed Cloud Services
› Education
Oracle’s Strategy
› Retain customers through high-margin sales channels
› Innovation through research & development
– Acquisitions
› Brand Name Growth
› Product Integration
Revenue
› Software
– License Updates & Product
Support
– New Software Licenses
› Hardware
– System Products
– System Support
› Services
– Consulting, Cloud,
Education
2012 Revenue
43.67%
Software License Updates &
Product Support
26.69%
New Software Licenses
10.31%
Hardware Systems Products
6.67% Hardware Systems Support
12.67% Consulting, Cloud Services,
Education
Projected 2018 Revenue
47.42%
Software License Updates
& Product Support
28.68%
New Software Licenses
7.88%
Hardware Systems
Products
5.58%
Hardware Systems
Support
10.44%
Consulting, Cloud
Services, Education
Risks and Potential Drawbacks
› Inexperience in Hardware Systems
› Legal issues
› Competition
› Security Threats
Positives
› Margin growth in nearly all revenue segments
› Expansion globally
› Elite-talent retention
› Continued acquisition program
› An expanding stock repurchase program and increasing
dividend
DCF Expectations
› Slightly increasing COGS as a percent of revenue
› Most costs increase slightly into terminal year
– Personnel related
› Tax rate of 24%
› Accelerating/Decelerating rates as opposed to straightline rates
› Increasing capital expenditures and acquisitions
DCF Valuation (50%)
› Possible reasons for price
differential
– Market Risk Premium
– Beta
Implied Price
35.06
Current Price
35.92
Overvalued
(2.39%)
Comparables Screening
› Industry
› Business Operations
› Size
› Beta
› Growth
› Margins
Comparables
› Microsoft (MSFT) – 40%
› Intel (INTC) – 5%
› Salesforce.com (CRM) – 5%
› CA Technologies (CA) – 30%
› Red Hat (RHT) – 20%
Forward Comparables Valuation (50%)
› Discrepancies
– Growth
– Bottom-Line
Margins
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
$27.75
27.59
39.22
38.02
44.47
97.92
$39.93
35.92
11.16%
Weight
0%
0%
25%
50%
25%
0%
Final Valuation
Source
Forward Comps
DCF
Price Target
Current Price
Undervalued
Implied Price Weight
$39.93 50%
35.06 50%
37.50
35.92
4.39%
Implied Price
Undervalued/(Overvalued)
Market Risk
Premium
Terminal Growth Rate
Terminal Growth Rate
37
2.3%
2.3%
3.0%
3.8%
4.5%
5.75%
40.5
40.5
42.8
45.9
50.6
6.25%
38.6
38.6
40.4
42.8
46.2
7.00%
36.2
36.2
37.5
39.2
41.4
7.75%
34.3
34.3
35.3
36.5
38.1
8.25%
33.2
33.2
34.0
35.0
36.3
Recommendation: Hold Tall Firs and Svigals
› Strong brand name with history
› Continued long-term growth
– Acquisitions
– High-margin sales channels
› Revenue and margin growth in competitive industry
› Marginal undervaluation
Questions