Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) are both considered mature tech stocks, but the former has outperformed the latter by a wide margin over the past five years. Microsoft's stock rallied about 200% as its cloud growth initiatives kicked in, while Oracle's stock rose by about 30%.
Based on that growth, investors might assume that Microsoft is a better buy than Oracle. However, past performance never guarantees future gains, so we should take a fresh look at both companies to see which is the better overall investment.
The differences and similarities between Microsoft and Oracle
Microsoft and Oracle are both offsetting the slower growth of their legacy businesses with higher-growth cloud services.
Microsoft previously struggled with slowing demand for its Windows licenses, so it focused on growing its "commercial cloud" businesses, which include Office 365, Dynamics 365, and Azure, to boost its revenue again. It also expanded its hardware business with new Xbox consoles and Surface devices.
Meanwhile, Oracle has struggled with sluggish demand for its on-premise database software and hardware. To offset that slowdown, Oracle launched new cloud-based software, infrastructure, and platform services, and acquired industry peers like NetSuite.
However, Microsoft has fared much better with its cloud efforts. According to Right Scale's 2018 Cloud Report, only 5% of enterprise customers adopted Oracle Cloud, versus 58% for Microsoft's Azure and 68% for Amazon's (NASDAQ:AMZN) market-leading AWS (Amazon Web Services).
As a result, Microsoft's commercial cloud business became its most-closely watched growth engine. Oracle, however, saw its cloud growth decelerate significantly before it abruptly stopped disclosing the growth of its SaaS (software as a service) and IaaS/PaaS (Infrastructure/Platform as a service) revenues separately last year.
How fast are Microsoft and Oracle growing?
Microsoft's revenue rose 14% to $125.8 billion in fiscal 2019, which ended on June 30. Its adjusted net income rose 22% to $39.2 billion as its adjusted EPS rose 22%. Wall Street expects its revenue and earnings to rise 11% and 10%, respectively, this year.
Microsoft's growth was mainly supported by its commercial cloud business, which posted 39% year-over-year revenue growth last quarter and accounted for over a third of its top line. Azure, which posted 68% revenue growth in constant currency terms, was its fastest growing division.
Oracle's revenue stayed nearly flat at $39.5 billion in fiscal 2019, which ended on May 31. Its adjusted net income rose just 2% to $13.1 billion, but its adjusted EPS -- heavily boosted by buybacks -- increased 16%. Analysts expect Oracle's revenue and earnings to rise 1% and 10%, respectively, this year.
Oracle's core business became tougher to analyze after it blended its cloud services units with its legacy businesses last year. But during the first quarter, its cloud and license support revenue -- which accounted for nearly three-quarters of its sales -- rose 4% in constant currency terms. However, that growth was offset by currency headwinds and declines in all three of its other businesses -- cloud and on-premise licenses, hardware, and software -- so its total revenue stayed flat.
The tailwinds and headwinds
Microsoft's near-term tailwinds are easy to spot. Its commercial cloud business, riding on the back of its Windows 10 ecosystem, will likely keep generating double-digit growth as it splits the cloud platform market with Amazon.
Its gaming business, which experienced a slowdown in recent quarters as the Xbox One matured, should grow again after it launches the new Xbox Scarlett console next year. Sales of its Surface convertibles and laptops should also accelerate after Intel resolves its chip shortage.
Oracle faces more headwinds than tailwinds. Its revenue growth was disappointing last quarter, and it abruptly disclosed that co-CEO Mark Hurd, who led its push into cloud services, would take a medical leave of absence. Oracle remains a distant underdog in the cloud market, and Amazon is launching its own cloud-based database solutions to challenge Oracle's core business.
Oracle partnered with Microsoft earlier this year by letting enterprise customers split their workloads between the two companies' cloud platforms, but it's unclear if that effort will hold Amazon at bay. Oracle also repeatedly "buys" its earnings growth with billion dollar buybacks, which does nothing for its long-term revenue growth.
The valuations, dividends, and verdict
Microsoft clearly generates stronger growth than Oracle. However, it trades at 23 times forward earnings, which is significantly higher than its earnings growth rate and Oracle's forward P/E of 13. Microsoft's forward yield of 1.3% is also lower than Oracle's 1.7% yield.
Microsoft is the pricier stock, but the strength of its cloud business and its upcoming tailwinds justify that premium. Oracle is cheaper, but it isn't a value play because it lacks near-term catalysts.
Oracle's business model is too opaque, it's too dependent on buybacks, and Hurd's departure raises serious questions about its future cloud strategies. Therefore, I think Microsoft will keep outperforming Oracle for the foreseeable future.