Stanley Druckenmiller (Trades, Portfolio) is a billionaire investor and the founder of Duquesne Capital Management. He is a macroeconomic specialist who uses both bottom-up fundamental analysis and technical charts to make investing decisions.
In the 13F filing for the three months ended June 30, Druckenmiller revealed he purchased shares of Oracle Corp. (ORCL, Financial). This is a business that is transforming and recently reported a beat for both top and bottom-line expectations in the second quarter.
Transforming business model
Oracle is a legacy software company known for pioneering the relational database management system, which was launched in the late 1970s. The company also introduced the first commercially available implementation of the programming language SQL, after being developed originally by IBM (IBM, Financial).
Today, SQL is still the world’s most popular language for querying databases and it is used by data scientists for data transformation.
The company has gradually been evolving its business model to focus more on the cloud. This industry is dominated by the three major players Amazon's (AMZN, Financial) AWS, Microsoft's (MSFT, Financial) Azure and Alphabet's (GOOGL, Financial) Google Cloud. However, Oracle has positioned itself as a partner for organizations that wish to comply with data residency requirements. For example, in the European Union and China, customer data is required to be kept in that region.
This is also becoming a popular requirement in the U.S. For example, in March, the CEO of TikTok faced a roasting by U.S. Congress for its storage of U.S. citizen user data. Congress alleged that China had access to the U.S. user data, as TikTok’s parent company is Bytedance. This was denied by TikTok, which currently stores its data in the U.S. and Singapore. However, in order to really squash these rumors, the popular app's CEO has promised a new setup with Oracle to secure all data in the States. This media attention has further helped to position Oracle as a go-to provider for such companies.
Oracle also offers a variety of applications from enterprise resource planning to supply chain management software. Historically these applications were provided on-premises, but have transitioned to the cloud in recent years.
Super financials
In June, Oracle reported solid financial results for its fiscal fourth quarter and full-year 2023. Its quarterly revenue of $13.84 billion beat analyst forecasts by $102.5 million and rose by 16.86% year over year.
This was driven by total cloud revenue of $4.4 billion, up 55% year over year. Software-as-a-service revenue increased 47% to $3 billion. The result is even better (up 33% to $3.8 billion) if we exclude Cerner.
Cerner is a digital health care provider that was acquired by Oracle in 2022. The business plans to digitize health records and vastly improve the experience of getting health care. Oracle is already making progress with the technology and introduced a voice assistant for doctors to easily access medical records.
Oracle's back-office SaaS applications have also continued to grow, with revenue growing 24% year over year to $6.6 billion.
Infrastructure cloud services were the real star, with an 89% increase in annualized revenue reported to $5.2 billion. The only negative was its legacy software license revenue, which declined 14% year over year to $4.4 billion.
Margins, cash flow and balance sheet
Moving on to margins, the company reported a 78% gross margin, which was solid. This helped to drive a 19% increase in gross profit overall. Its infrastructure service gross margin has also continued to improve as the business scales.
Oracle reported operating income of $4.29 billion, which declined by 6.79% year over year. A positive is, on a non-GAAP basis, its operating income rose by 12% year over year to $6.2 billion.
Earnings per share of $1.67 beat analyst forecasts by 9 cents.
The company reported strong free cash flow of $3.7 billion, which rose by 46% year over year. Over the trailing 12 months, its operating cash also rose by 80% year over year, which is fantastic.
Moving on to its balance sheet, Oracle reported $10.18 billion in cash and short-term investments. However, the company does have total debt of $95 billion.
Valuation
Oracle trades with a price-sales ratio of 6, which is higher than its five-year average.
The stock also trades with a price-earnings ratio of 21, which is higher than its average for the same period.
The GF Value Line also indicates a fair value of $97 per share based on its historical ratios, past financial performance and future earnings projections. Therefore, the stock is modesty overvalued at the time of writing.
Guru interest
Druckenmiller purchased 271,265 shares of Oracle during the second quarter. The stock traded for an average price of $103.23 per share during the three-month period, which is only 11% cheaper than where the stock traded at the time of writing.
However, we do know Druckenmiller is a growth stock investor, so he is fine with paying a premium for companies that are growing revenue with a long runway ahead.
Investors Ken Fisher (Trades, Portfolio), Jefferies Group (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also purchased shares of Oracle in the second quarter.
Final thoughts
Oracle is a legacy technology business that has effectively reinvented itself. Although the company is a far cry from rivaling the major cloud titans, its niche offering does offer huge potential. Its second-quarter financial results were fantastic and show the company is growing again at a solid clip. Therefore, despite the lofty valuation, the stock still looks enticing for growth-oriented investors.
