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The Cloud Obscures Oracle's Future

The cloud transition brings too much uncertainty.

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Oracle (ORCL) is a best-of-breed provider of on-premises relational database technologies and enterprise resource planning software. It is one of the most profitable companies in the software industry. However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition is likely to provide headwinds. As a result, we have downgraded our economic moat rating to narrow from wide while maintaining our negative moat trend rating. However, we raised our fair value estimate to $53 per share from $50 as we see more organic growth potential for Oracle. This increase doesn’t factor in a partnership with TikTok, as that deal remains unfinalized.

Oracle’s business centers on its relational database, which stores a treasure trove of data that is the lifeblood of many enterprises. Oracle’s software offerings leverage this database as its back end, while Oracle’s servicing and hardware businesses support these database tasks. Oracle remains a best-of-breed provider of on-premises databases and software, and customers face very high switching costs if they look to migrate elsewhere. However, we don’t view the company as being at the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs.

Julie Bhusal Sharma does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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