Amid a Treacherous Mix of Rising Rates, Soaring Inflation, and Recession Concerns, the It Industry Provides Few Hiding Spots for Investors.

June 19, 2022 at 09:01 AM EDT

Investors have few safe havens in the IT sector, which is beset by increasing rates, mounting inflation, and recessionary fears.
There are no more high-growth, profitless software companies that fueled the industry’s rapid rise during the pandemic. Internet and hardware firms that cater to consumers are in decline, while ad buyers and supply chain concerns are hurting semiconductor companies’ social media investments. More than half the value of several tech equities has been wiped out in the last 12 months.
As I’ve said in previous articles, I think the argument for cloud computing is still strong. We can see this from the latest earnings reports from Amazon.com AMZN +2.47 percent (NASDAQ: AMZN), Microsoft MSFT +1.09 percent (MSFT), and Alphabet GOOGL +1.05 percent (GOOGL). As cloud computing promises more flexibility and lower prices, it is reshaping the way businesses use computers.

By 2024, a Credit Suisse analyst estimated that public cloud IT investment in the corporate sector will overtake on-premises IT spending. When it comes to eating the world, cloud computing is not only software. Microsoft Azure’s growth potential is being underestimated by Wall Street, according to Winslow. The best long-term cloud investments, in my opinion, are Microsoft and Amazon.

However, another cloud play that is still in plain sight has promise in my opinion. in which I asserted the underappreciated cloud prowess of the corporate database and app giant Oracle (ORCL), I produced a bullish cover essay in February 2021.

Both Oracle and Oracle Cloud, a new entrant to the public cloud’s “Big Three,” pushed their customers to use their software on the cloud. Despite Oracle’s progress toward the cloud, investors remained unconvinced. Oracle’s stock surged more than 70 percent by mid-December, as quarterly results showed that the company’s cloud strategy was continuing to perform well.

Then came two events that sent the stock soaring. It became clear that the tech selling spree was gaining speed at a macro level. Even Oracle wasn’t safe from the sell-off, which started with pandemic darlings like Zoom Video Communications (ZM) and Peloton Interactive (PTON). A $28 billion cash deal to acquire Cerner, an electronic medical records corporation that serves hospitals and other health care institutions, was a major worry.

Cerner is Oracle’s greatest purchase to date. Oracle has made several significant acquisitions over the years—PeopleSoft, Siebel, and Sun Microsystems are just a few examples. Oracle is making significant investments in the digitization of healthcare. Cerner’s software migration to Oracle’s cloud is also a risk that will return substantial savings. In spite of Oracle’s assurances that the acquisition would immediately enhance its profitability, the deal raises integration risk, increases Oracle’s debt, and reduces the aggressiveness of the company’s stock repurchase program.

Oracle stock has fallen 38 percent since the Cerner transaction was announced, wiping off around $100 billion in market value.

An analyst at Deutsche Bank believes the purchase of Cerner has raised doubts about Oracle’s cloud strategy, which has fueled the stock’s 2021 surge. Those already concerned about Oracle’s cloud strategy were given ammunition by the deal.

However, Oracle’s latest findings show that the shift is still taking place.

In Oracle’s fiscal fourth quarter ended May 31, sales of $11.8 billion were up 10% in constant currency, the company’s best growth quarter since 2011. The sum exceeded both business and Wall Street expectations.

Safra Catz, Oracle’s CEO, warned investors that cloud revenue growth might rise from 25 percent to 28 percent in the August quarter, and 30 percent or more in fiscal 2023. As recently as Friday, TikTok announced that it will move all of its U.S. user traffic to the Oracle Cloud.

Following the announcement, Oracle shares surged and closed the week higher, a rare success in an otherwise terrible week for markets.

According to Zelnick, Oracle’s projections indicate that the whole company’s revenues will continue to increase at a high single-digit rate on a currency-adjusted basis for the foreseeable future.

It is true that no company can withstand a major economic downturn, but Zelnick thinks that other factors will play an even greater role in Oracle’s future success. It’s good for Oracle since they’re upgrading their own organization and taking away costs from Cerner,” Oracle CEO Larry Ellison said. According to Zelnick, Oracle’s customer contracts include inflation-index-linked price increases. Because Oracle software is so tough to switch from, consumers don’t object to price rises.

Oracle’s stock has fallen in price, making it a bargain by most metrics. Zelnick expects profits of $5.36 a share for the May 2023 fiscal year, and the stock is now trading at less than 13 times that figure. That’s less than half of Microsoft’s value on both metrics.

The stock should rebound regardless of the recession if Oracle’s cloud growth ambitions are realized.

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