There’s a simple reason why Oracle (NYSE: ORCL) is one of the best value investments around these days. The financial software provider is swimming in cash, and it is underappreciated and ignored by Mr. Market.
Larry Ellison’s company had $55.93 billion in cash and short-term investments—the bank, in layperson’s terms—on August 31, 2015. Yet Oracle shares were trading at $38.10 at the close of business on October 9, 2015. That means Oracle now has more money in the bank than Apple (NASDAQ: AAPL) does. For the record, Apple had $34.7 billion in cash and short-term investments on June 30, 2015.
Why Oracle Could Be a Better Stock Than Apple
That’s a pretty interesting achievement because Apple reported revenues of $224.34 billion on June 30, 2015, and an enterprise value of $659.10 billion and a market capitalization of $639.39 billion on October 9. Apple’s shares were trading at $112.12 on October 9, 2015, which indicates that it is also undervalued.
In contrast, Oracle reported revenues of $38.08 billion on August 31, 2015. It also had a market capitalization of $162.64 billion and an enterprise value of $149.20 billion, indicating that it is definitely undervalued. This looks like a super value investment because of the low price and the cash.
What’s even better is that Oracle offers a great reward to its investors. It reported a dividend yield of 1.50%, a payout ratio of 26.97% and a return on equity of 19.90% on August 31, 2015. That makes Oracle a very sweet stock for investors and a classic value play Benjamin Graham would have loved.
Old Ben would have loved Oracle for another reason: It is swimming in the cash right now. On August 31, Oracle reported a free cash flow of $5.41 billion, a net income of $9.501 billion and $13.46 billion in cash from operations for the third quarter of 2015. To add icing to the cake, Oracle also reported sales estimates of $38.03 billion for the current fiscal year.
How Larry Ellison’s Money Machine Works
Not surprisingly, a lot of people will be wondering how Oracle is generating all that cash because unless you have worked in financial services or accounting at a large corporation, you are probably completely unfamiliar with Oracle. Oracle makes the accounting and financial solutions that banks, government, and big corporations utilize and pay big money for.
When I worked in accounts payable at a big publicly-traded corporation, I used Oracle products every day. If it wasn’t for the Oracle system, the company would have never been able to keep track of its expenses or pay its bills. Naturally, one of the largest payments we sent out every year was to, you guessed it, Oracle.
What’s even more interesting is that Uncle Sam and other governments are some of Larry Ellison’s best salesmen. In the United States, a federal law called Sarbanes-Oxley mandates that all publicly-traded corporations meet certain reporting standards. If they do not, corporate executives can find themselves bunking at a federal prison.
Oracle’s products are designed to help corporations meet those standards at the push of a button. Any reasonably literate person can do a corporation’s books using Oracle software.
Some Important Value Lessons from Oracle
Oracle also meets a lot of the criteria of a classic Warren Buffett-style value company. These lessons can show value investors what to look for in a money-making stock.
The value criteria that Oracle has include the following:
- It generates a lot of cash, as I’ve noted above. As Benjamin Graham would say, it makes money.
- It is cheap and definitely undervalued, as I have also noted above.
- Oracle has a lot of float because of the nature of its business. To legally use Oracle software, you have buy a software license and pay for it every year. Under federal law, that’s an expense that a corporation has to pay every year. This generates a steady stream of income similar to the insurance premiums that Larry Ellison always has available.
- Oracle is in a very unsexy and unglamorous business that gets ignored by Mr. Market. Let’s face it—force accounting and financial services are not sexy; even most nerds find them boring. Yet they are vital to the functioning of our entire civilization. This makes Oracle very similar to one of Warren Buffett’s favorite investments: logistics.
- Oracle has a product that a lot of customers constantly need. Every company needs to do its books, monitor its cash flow and do its taxes. Large organizations need to do this year in and year out. As with logistics, there is constant demand for Oracle’s services.
- Oracle is one of those companies that is everywhere, even if you have never heard of it. Chances are Oracle software is at your bank, in your company’s accounting department and possibly in your local government office. This gives Oracle a vast and steady customer base.
- Oracle proves that a technology company can be a value investment. In fact, some tech companies now have so much cash that there seems to be a whole class of technology companies that are value investments. Some of these companies, including Oracle, Microsoft (NASDAQ: MSF) and Cisco Systems (NASDAQ: CISCO), are incredibly undervalued.
- This brings us to the most important lesson of all. The place to look for value investments is in the financial numbers. I discovered Oracle’s cash by looking through the data provided by YCharts. If you want to make money in the stock market, learn to read the financial numbers. They can teach you far more about a company than the entire financial media.
So yes, folks, there are still some really great value investments and undervalued stocks out there. Oracle demonstrates that you just have to learn where to look for them.