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Stock Analyst Update

Cloud Computing Continues to Threaten Oracle

We are lowering our fair value estimate for the firm while maintaining our wide-moat but negative moat trend ratings.

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We are lowering our fair value estimate for  Oracle (ORCL) to $46 from $49 while maintaining our wide-moat and negative moat trend ratings for the firm. While we still see risks to the firm's competitive advantage because of the rise of cloud computing, we still believe the company's core relational database customers are highly sticky.

The rise of alternative solutions to Oracle’s core offering, on-premise relational databases, has created uncertainty around Oracle’s long-term future in the software ecosystem. Companies continue to shift some relational database workloads to the cloud and are exploring ways to utilize new non-relational database solutions like NoSQL and Hadoop. Despite these headwinds, we believe that Oracle will still play a vital role in software for many large companies and the firm still warrants a wide economic moat.

We believe that Oracle has been relatively slow to react to these new challenges and will likely continue to lose market share as database growth at large cloud vendors like Amazon Web Services outpaces Oracle's growth rate. According to Gartner, the overall database management market is expected to grow from $39 billion in 2017 to $68 billion in 2022. Oracle's strength is in relational databases, used to organize and access data tables using SQL queries. The growth rate of nonrelational databases will greatly exceed the pace of relational databases (36% versus 9%) through 2022 but the relational database market is still significantly larger today and should remain relevant in the long term. We suspect that growth in relational databases will continue to come from the cloud as it has in recent years. Oracle has underinvested in its cloud offering compared with peers such as Amazon or Microsoft, and we foresee the firm continuing to play catch-up. That said, Oracle has seen 30%-plus revenue growth on average in that business over the past three years and the growth of this business is expected to continue.

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John Barrett 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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