I am on the hunt for future buys within the tech stocks sector. This is the highest growth sector of the US economy and I want to diversify in to other areas. I am systematically working through the bigger players within the tech stock sectors. With that, I am looking at Oracle Inc. – ORCL Stock – as a potential long term investment. I use value investing principles and strip out the highly technical analysis angles and focus on the most basic elements of understanding a stock.
That being said, Oracle has large future increases in their future, including this year’s big nearly 30% revenue increase over 2022. Then, there is likely a near 10% revenue increase for 2024. How that plays out done the income statement is what I wanted to break down and see if this is a stock that I plan on picking up with any future declines.
Another aspect of what I am looking at within my analysis is that no company is an island, all companies operate within an economy. The US economy is currently on fire. I don’t want to buy in to anything that is on fire. Remember what Warren Buffett tells us: Be fearful when others are greedy, be greedy when others are fearful. With the broader economy on fire, all are greedy and I am sitting on my hands. But, that will turn soon. That is when I will be pulling the trigger.
There was a sizable jump in revenue – with continued expectations for 2023, and an in-kind increase for 2024. Outside of this, notwithstanding 2020, every year over the past several years, Oracle has increased its revenues. Given this, if you put Oracle within some form of global economy, one can reasonably assume that Oracle can increase its revenues. But, the economy in the US is likely to shift. Bond yields are pushing higher – albeit, they may have hit a ceiling for now. Bond yields are going to remain high for some time.
This will contract consumers’ capabilities to push the economy forward. The US economy needs to take a breather. This will turn in to a move lower in revenues, which will affect Oracle.
But, I expect that the moves lower in revenue for companies will be short lived. And, given what Oracle can do with an economy, any contraction in revenue – and, by extension profits, will likely push ORCL stock downward. The eventuality would be that ORCL stock will move higher once again after the contraction is over with, inflation comes back in to check, flows of capital regain normalcy, and other factors are back with norms.
Considering revenues, if you follow gross margins, operating margins, and then finally down to net margins, Oracle prints substantially higher net margins compared to the broader S&P 500 – which prints 8.25% net margin average. This tells me that given revenue gains, Oracle has pricing monopoly power in the sense that the competition cannot necessarily force Oracle to cut prices too much. This is important because I rarely ever want to get involved within a company that deals in base commodity-like products or services that have zero pricing capabilities.
Net margins are solid, but they are also well above average, albeit they bounce around a little. I do like slightly more consistency, but I can be forgiving. There are some seasonal factors here and there. However, if you take a step back and look at the bigger picture, weeding out the differences and minutia from one quarter to the next, you can see that with increasing revenues, Oracle also produces increasing earnings.
Earnings Per Share
Ultimately, it boils down to earnings per share for any company. There may be noise from net margins from one quarter to the next with Oracle. The picture above, the annual Earnings Per Share, shows that Oracle continues to print ever-increasing earnings. This is the second big piece of the puzzle that I am looking for when considering an investment. I want to be able to reasonably assume what will happen next with a company should I pick up its stock.
The above tells me that given any economy, Oracle can reasonably continue to increase its revenues. As a value investor, this is suck a crucial aspect of investing.
Oracle is a bit rich when it comes to price-to-earnings ratio. Basically, ORCL stock is highly sought after because of its abilities to increase revenues & earnings. But, this is by far not the best numbers. There are some concerns with Oracle and that manifests itself in recent ORCL stock moves. But, these very same concerns are exactly what is happening with the broader stock market across the board.
We are seeing rate normalization with interest rates and bond prices. Long term interest rates are moving higher and as an alternative, bonds are more attractive than stocks with lower yield rates.
ORCL stock had been flying a little too close to the sun and has since backed off. Currently, with the future $5.55 EPS for owning ORCL stock, an investor could expect a yield of 5.080% with today’s $109.21 purchase price. The US 10-Year Treasury is yielding 4.891%. There is a lot of downside risk to buying ORCL at this level, despite its relative comparison to the 10Year yield. But, the yield on the 10 year has far less risk and so this rate normalization is pushing stocks lower across the board.
Because of this, all stocks are likely to move lower and adjust to these new, more normalized prices. ORCL stock, despite its ability to perform within an economy, will move lower as the economy adjusts to lower borrowing needs from consumers and businesses.
I would be very willing to pick up ORCL stock. Just not at this level. I will wait for a sizable pullback and go from there.