Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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The Incredible Value at Oracle

From a numbers standpoint, Oracle (NYSE: ORCL) is one of the most intriguing value investments around.

The software provider reported cash and short-term investments of $66.90 billion on August 31, 2017. Yet Oracle had a market capitalization of $205.88 billion and a stock price of $49.33 on 13 November 2017. That certainly looks like a value investment to me, because it is an undervalued company with a lot of cash.

There are some other value attributes at Oracle as well. It is an unsexy company that Mr. Market likes to ignore. Oracle’s basic products; financial software solutions and platforms, are boring but highly lucrative.

Oracle is making a Lot of Money Right Now

More importantly, Oracle is making a lot of money right now. It reported a net income of $9.713 billion in August 2017; that was up from $9.335 billion in May 2017, and $8.985 billion in August 2016. This still well below the $10.95 billion in income Oracle reported in August 2014, but it points to a serious recovery.

What’s more interesting is that Oracle managed to achieve such numbers on just $14.84 billion in cash from operations, reported in August 2017. The cash from operations was also up considerably, it was $13.68 billion in August 2016.

Oracle also reported a great free cash flow of $6.093 billion on August 31, 2017. That number was a dramatic increase over the $3.941 billion free cash flow reported in May 2017, and the $5.576 billion from August 2016.

Oracle’s Revenues are Growing Again

What is most impressive is that those cash numbers were achieved on revenues of $38.31 billion from August 31, 2017. Those revenues are also growing again; they were up from $37.19 billion in August 2016.

Best of all, Oracle is able to achieve cash figures rivaling those of rivals like Alphabet (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) with far lower revenues. Microsoft reported a free cash flow of $10.31 billion on revenues of $94.04 billion on 30 September 2017. Alphabet (NASDAQ: GOOGL) reported a free cash flow of $6.334 billion on revenues of $104.60 billion on September 30, 2017.

This means Oracle spends less money to generate almost as much cash as bigger and better-financed rivals. That certainly looks like a value investment to me.

How Oracle Generates all that Cash

Larry Ellison’s formula for generating all that cash is the same as Warren Buffett’s: float.

Float is a continuing stream of income in the form of monthly, annual, or quarterly payments that are required by a contract. The float generates a pool of cash that the company can tap or borrow against for any purpose it wants to. Buffett famously describes insurance premiums as a source of float.

Oracle might have a better source of float in software licenses. Companies that want to use its products have to pay a regular fee for the right. Oracle’s financial platforms are standard in many companies and institutions.

To add icing to the cake, many companies need Oracle type solutions because of a federal law in the United States; the ever-popular Sarbanes-Oxley Act, mandates that corporate finances meet certain standards. Oracle’s solutions help companies comply with those standards.

Is Oracle a Good Stock?

Beyond the value characteristics, Oracle is a pretty good basic stock. It rewarded investors with a return on equity of 18.95% on 30 September 2017.

Oracle shareholders also received a dividend of 19¢ on 10 October 2017; that was up from 15¢ on 7 October 2016. The dividend is low, but that’s good because it means Oracle is conserving its’ cash.

Therefore I would call Oracle “a widows and orphans stock” because it is a reliable moneymaker that sells for a low price. The question investors will need to ask is how long can it continue to be a reliable moneymaker?

How AI and Blockchain Threaten Oracle’s Future

There are some serious threats to Oracle’s future out there including artificial intelligence, machine learning, and next-generation financial networking technology such as the Ethereum blockchain.

Artificial intelligence (AI) is a major threat to Oracle because it is already possible to deploy algorithms that can perform a wide variety of financial operations. New technologies like machine learning and neural networks can enable AIs to process invoices and examine accounts for fraud right now.

A major menace to Oracle will be large organizations replacing most or all of their accounting staff with AIs. Think of it this way, if you run a sales organization, you might increase your revenues by eliminating a highly-paid accountant and replacing her with two or three salespeople. Unlike an accountant, the salespeople can be out drumming up more business and making more money for the company.

Frighteningly, an AI might be able to do the work of several accountants or a whole accounting department. That might be good news for stockholders or employees in other areas of the company dreaming of raise, but it can be bad for Oracle; because no accountants, means no need for accounting software.

An equally bothersome threat is blockchain-based operating systems such as Ethereum, Waves, and NEO. The Ethereum network, in particular, can be used to deploy both artificial intelligence and a wide variety of finance and accounting solutions at a low cost.

This means it may soon be possible to scale large financial solutions quickly. That is why a wide variety of major banks and large corporations are experimenting with Ethereum through the Ethereum Enterprise Alliance and The Hyperledger Project.

How AI and Blockchain can Produce Larry Ellison’s worst Nightmare

A long-term nightmare for Oracle that is probable with present-day technology is an AI operating on Ethereum that provides all of a company’s or government’s accounting and money management services.

This is no idle fantasy several groups of data scientists are building AI-managed hedge funds on the blockchain. For examples of this tech and its implications; see Numerai and Sharpe Capital’s blogs on Medium.

The same tech can be deployed to create a chief financial officer (CFO) in an app or an accounting department on the blockchain. All the CEO, or entrepreneur, in the near future (say 2025) will need to do to access such services is touch an app. In such a world, Oracle’s platforms might be as obsolete as a phone book, and a lot of accountants will be pursuing new career paths at Uber and Grubhub (NYSE: GRUB).

Even if such predictions come true, and I think they will, Oracle should make a lot of money for a few more years. There will be plenty of companies and organizations; such as government agencies, that will keep using the old tech as long as they can. More importantly, the stock is cheap enough for investors to take that risk.

If you are looking for a value stock in technology that can make a lot of money, Oracle is it. Just be aware of the serious threats that fast-developing technology poses to its’ lucrative business model.