What a time it’s been for Oracle. In the past six months alone, the company’s stock price has increased by a massive 85.9%, reaching $261.58 per share. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Oracle, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Do We Think Oracle Will Underperform?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Oracle. Here are three reasons we avoid ORCL and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Oracle’s billings came in at $17.56 billion in Q3, and over the last four quarters, its year-on-year growth averaged 9.2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Cash Burn Ignites Concerns

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.

Oracle’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10%, meaning it lit $9.96 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments (i.e., stocking inventory, building new facilities) are the primary culprit.

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 $5.88 billion of cash over the last year, and its $91.32 billion of debt exceeds the $11.01 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 falls short of our quality standards. Following the recent rally, the stock trades at 10.6× forward price-to-sales (or $261.58 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Oracle

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