It has been a long, difficult road for both Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORCL) as each navigates their way to new, cutting-edge markets. The good news for investors, particularly those in search of growth and income alternatives, is that Microsoft and Oracle are both making strides to carve out a place for themselves in the fast-growing cloud market.
The opportunities the cloud offers Microsoft and Oracle are nearly limitless. Industry pundits expect cloud and related offerings will become a $100 billion plus market in the coming years: and that's not even the good news for Microsoft and Oracle. What really stands out is that both are focused on delivering Software-as-a-Service (SaaS) and related cloud-based solutions, rather than simply focusing on data hosting which is a business that has already become commoditized.
That said, despite their many similarities, one of these companies offers investors a slightly better opportunity in the months and years ahead.
Image courtesy of: Oracle.
The case for Oracle
Despite a drop in total revenue last quarter -- from $9.33 billion to $9 billion -- a bump in expenses, and squeezed operating margins, Oracle shareholders have enjoyed a 4% jump in share price in the past month. Why? Because, Oracle is making headway in its transition to becoming a leader in the SaaS and Platform-as-a-Service (PaaS) cloud solutions markets.
According to founder and now executive chairman Larry Ellison, Oracle is "already selling more enterprise SaaS and PaaS new cloud revenue than any other company in the world." That may be a bit of a stretch, given that Oracle reported total cloud sales of $735 million last quarter. Which isn't quite in the same ballpark as Microsoft and other cloud providers, but it did demonstrate a 40% improvement compared to the year-ago period.
Oracle's cloud results look even better when infrastructure sales, which declined 2% year-over-year to $152 million, are removed from the equation. The all-important SaaS and PaaS units climbed an impressive 57% in fiscal Q3, giving investors hope that Oracle's commitment to all things cloud-related is paying off.
Just as important as Oracle's cloud growth is the sense that, like Microsoft, the Street is finally beginning to recognize hardware and other legacy business sales aren't where Ellison and team's bread is buttered any longer. Now add in a respectable 1.5% dividend yield and its forward price-to-earnings (P/E) ratio of just 14, and there's a compelling argument for Oracle.
Image courtesy of: Microsoft.
The case for Microsoft
When CEO Satya Nadella replaced longtime chief Steve Ballmer in Feb. of 2014, one of his first orders of business was to introduce Microsoft employees and investors to his "mobile-first, cloud-first" mantra. Microsoft stock continued to be battered with each new, depressing PC sales forecast. But as Nadella's transformation efforts began to pay off, investors slowly caught on to the fact that Microsoft wasn't reliant on PCs any longer, and just as with Oracle, shareholders are finally reaping the rewards.
Though Microsoft's string of consecutive quarters with triple digit cloud sales growth has finally ended, its annual revenue run-rate of over $9.4 billion as of last quarter puts it squarely at the head of the class. Like Oracle, what makes Microsoft's cloud results even better for investors is that it's led not by the Azure data hosting platform, but the adoption of industry standard SaaS solutions including Office 365, Dynamics CRM, and similar products.
Last quarter's nearly 70% jump in Microsoft's Office 365 revenue is a testament to both its cloud-first pillar, as well as its mobile efforts. Some pundits have lamented the poor sales of Microsoft's smartphone line-up as proof Nadella's mobile-first initiative is failing. Thing is, Microsoft's mobile success isn't about selling smartphones: its objective is to get its assorted cloud-based SaaS solutions into as many devices as possible, regardless of manufacturer or operating system.
A more than 20% jump in search revenue, doubling the number of Dynamic CRM users, and the aforementioned Office 365 results speak to Microsoft's mobile success. Now toss in a 2.7% dividend yield to its industry-leading cloud sales, AI, and augmented reality development --among other innovative technologies -- and Microsoft earns a slight nod over Oracle.
