3 Keys to Oracle's Wide Moat

John Barrett: Three-star, wide-moat Oracle is a software company that pioneered the relational database in the late 1970s. Their business focuses on providing database and enterprise resource planning, or ERP, solutions to big businesses. There are three key reasons we like Oracle's wide moat.

The first reason is the high switching cost in Oracle's core relational database business, which makes up roughly 35% of Oracle's revenue. The relational databases store a company's mission-critical data. It is important to note that we believe the switching costs are exponentially higher for a global company than a small business, as converting numerous servers in remote locations all over the globe is significantly more complicated than changing out one server at one location.

The second reason is we believe the rise of nonrelational databases like NoSQL and Hadoop are overhyped. These new databases are being used to process large amounts of unstructured data and are providing new ways for companies to use analytics. We think these solutions are unlikely to completely replace relational databases and that relational databases will continue to play a key role in many corporations' IT solutions for a long time.

The third reason is the high switching costs of Oracle's ERP business. Through internal development as well as a number of acquisitions, Oracle has built out an ERP solution that includes applications like client relationship management, human capital management, financial tools, and supply chain management. These applications are typically used by every department of a company on a daily basis, so there is a risk of very serious business disruption when thinking about switching ERP providers.

Even with these characteristics earning Oracle a wide moat, we currently view the stock as fairly valued and recommend investors wait for a larger margin of safety before investing.