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Portfolio Manager Monthly Insights
Jason Miller, MBA, CFA
Vice President, Portfolio Manager
Mackenzie Ivy Foreign Equity Fund
Oracle – From Darling to Dog and Back to the Middle
Years ago, a software company was the darling. It was innovative, had great technology, the stickiest customers, rapid growth, a great balance sheet, astute and conservative management and an engineering culture strongly aligned with its product and business. It traded at more than double the multiple of its key and larger peer that is currently part of the “Magnificent Seven”, Microsoft. That company is Oracle. From 2004 to 2012, an investment in Oracle trounced one in Microsoft, the S&P and the Nasdaq. However, its darling status would not last.
Oracle underinvested in the cloud. If Larry Ellison is one of the great futurists, how could Oracle make such a mistake? Even Steve Ballmer, everyone’s favourite CEO to criticize, reported that the majority of Microsoft’s investment resources were focused on the cloud in 2010. Like with everything, (even Ballmer’s track record as CEO, not on-stage promoter) there is nuance.
Oracle didn’t invest in the cloud because the CEO thought typical Oracle enterprise customers would not adopt the cloud. For classic Oracle database customers and large SAP enterprise resource planning (ERP) customers, that has remained true until recently. From 2013 to 2021, Oracle revenues stagnated, declining in real terms and even more so when measured against peers Microsoft, Adobe and Salesforce.
Although financial results from this era were unimpressive, Oracle was not strictly in harvest mode. It was re-purposing its culture towards its customers and aggressively investing in its product and technology offer. Our purchase of Oracle in 2015 was premised on an attractive valuation and a company investing into the business.
Through 2021, this transition was unfolding as hoped. Oracle’s software as a service (SaaS) business was growing well above 20% and its newly engineered cloud business was taking off. The final and largest part of Oracle’s business, the database was showing emergent signs of growth. Oracle investors were excited. However, the transition to darling was put on hold.
An aspect of Oracle’s culture we didn’t speak to is how it prides itself on being a predatorial value investor. In a move that disappointed the market, in late 2021 Oracle announced its acquisition of Cerner, the number two electronic medical records (EMR) company in the US. This added considerable debt and a low growth but strategic business just as the overall market turned down. Oracle’s shares declined from a high of $106 to just above $60 as investors were stunned by the acquisition and concerned about the company’s balance sheet.
From there, Oracle’s shares more than tripled to just under $200 per share. Oracle was ascendant, striking deals with key partners, including AWS, while its revenue growth accelerated. The positive sentiment hit a high note in late 2024 when investors increasingly underwrote management’s medium-term financial targets calling for $100+ billion in revenues.
Through 2024 we reduced our position in Oracle. The investment thesis with Oracle was premised on a steady revenue inflection alongside significant free cash flow generation. Over time, the company would pay down the debt it issued to purchase Cerner, eventually returning capital to shareholders or making predatorial purchases of software companies. The improved growth and balance sheet would result in a valuation comparable to its larger peer, Microsoft. During 2024 this view was largely adopted by the market. Unlike pundits who argue for or against CEOs based on quips or poorly understand investments, investing remains complex and nuanced, unfit for table pounding and bold claims.
While Oracle’s outlook remains bright, risks remain. The company’s free cash flow is depressed based on large capital investment to support artificial intelligence (AI) based cloud workloads. This increases the risk of leverage and downside capture. The returns on these capital investments carries uncertainty. Tik Tok is a customer. Political risks for tech companies have increased. However, at the time of writing, Oracle is experiencing the benefits of political risk with its CEO on stage alongside the President. All in, the balance of opportunities from AI and a strong business model set against a less-than-ideal capital structure, means we still hold the shares but at a much lower weight than historically.
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