Oracle's Cloud Position Improving, But RBC Cautious On IaaS Investments

RBC Capital said it needs further clarity from the Oracle Corporation (NYSE: ORCL) over impact on the model from the shift of database to cloud and incremental investments in IaaS.

However, the brokerage came from Oracle's Open World and analyst meeting with a positive frame of mind, as the company's cloud position is improving.

Rating And Justification

RBC reiterated its Outperform rating and $42 price target, citing potential multiple expansion of the stock if investors gain more conviction on Oracle's cloud transition.

This week, Oracle made a number of new product announcements including Oracle 12C Release 2 database and Oracle IaaS (second generation). The company also unveiled Oracle Exadata Express Service, a low-cost cloud offering for <50GB database.

Related Link: Oracle Has "A Long Journey Ahead" As It Shifts To Cloud

On the financial front, Oracle expects database new software license revenue to flatten in FY17 while PaaS revenue should grow.

"This suggests the database business will follow a different path from the application business and would support the view that the company will see improving software revenue growth in FY17," analyst Ross MacMillan wrote in a note.

Meanwhile, Oracle claims that PaaS pipeline is approaching $2 billion versus $700 million going into FY16. Oracle also highlighted success with ERP, where the company has 2,800 cloud customers and another 8,000 in the pipeline.

In IaaS, Oracle claims it offers 2.25x cores, 2x the D-RAM, 4.5x the storage capability, and 11.5x IOPS vs. the most powerful Amazon AWS all SSD offering for 80 percent of the price.

"We agree that Oracle has advantage today, but the question is what will the differentiation look like 3+ years in the future?" MacMillan posed.

Brief Overview Analysis

According to the analyst, the key positives include:

• "Significant EPS growth post FY17."
• "Only 3pp inorganic contribution in the 82 percent Y/Y CC growth in SaaS/PaaS revenue in F1Q17."
• "Oracle believes it could grow significantly if it is just successful in converting existing workloads."
• "The tax rate should normalize in three quarters."

The key negatives were:

• "Oracle does expect to spend more on capex to support IaaS growth in FY17 than in prior years (this could create a headwind to cloud gross margin expansion)."
• "Oracle had no choice but to move into IaaS to be able to support the migration of customer applications running Oracle database to the cloud."
• "It is unclear whether Oracle will own and operate its own data centers, but it is clear that ownership/control of network capacity is going to become much more important."

At time of writing, shares of Oracle fell 1.08 percent to $39.08.

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