Oracle Takes the Fight to Amazon With New Aggressively Priced Cloud Services

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Global software major Oracle Corp. (NYSE:ORCL) has entered into a price war with Amazon (NYSE:AMZN) with a string of new additions to its Oracle Cloud Platform. [1] Oracle, which is rapidly expanding its presence in the cloud computing market, hopes that the combination of low pricing and a comprehensive cloud product portfolio will win customers over.

The 24 new services announced by Oracle earlier this week are steeply discounted compared to Amazon Web Services’ prices. Oracle used a similar strategy earlier this year for its engineering systems product line. (Read: Oracle Triggers Price War in the Servers Market) It is worth noting that the engineered systems product line is currently Oracle’s second highest growth priority after the cloud computing market. The repetition of this aggressive pricing strategy in Oracle’s two biggest focus areas indicates its determination to achieve fast revenue growth, even if it comes at the cost of lower profit margins.

We have a price estimate of $42 for Oracle Corp., which is nearly the same as its current market price.

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See our complete analysis for Oracle Corp. here

Competition in Cloud Set to Soar Sky-High

Oracle was a relatively late entrant to cloud computing and has been attempting to catch up ever since. Its revenues from cloud are so far a fraction of the cloud revenues of Amazon, which leads the cloud computing market and, Microsoft Corp. (NYSE:MSFT), which is at a close second. In calendar 2014, Oracle’s revenues from the cloud, including Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) stood at $1.8 billion. In comparison, Amazon Web Services clocked in revenues of $4.6 in 2014 and is at a $6.3 billion revenue run rate [2] for the current year.

On the other hand, Oracle expects its SaaS and PaaS revenue to grow at around a 40% clip in fiscal 2016. It did not provide guidance for IaaS revenue growth. Assuming the current trend of 30% annual growth in IaaS, Oracle’s cloud revenue could reach almost $4 billion in fiscal 2016. Now with Oracle’s aggressively priced new products, an already heated competition in the cloud computing market is set to soar to unprecedented levels. We currently expect Oracle’s share in the global SaaS and PaaS market to expand from the current 2% to 3% by 2021.

SaaS and PaaS Margins Could Face Pressure from Low Pricing

One of Oracle’s latest cloud products, Archive Storage, is priced at one-tenth of the competing service offered by Amazon. [1] This underscores the extent to which Oracle is willing to sacrifice margins to win market share in the cloud computing industry. Granted, Oracle will need to sell more of its products to achieve the same level of revenue. But cloud products are inherently lower priced than their on-premise counterparts, which inherently makes cloud computing a volume play.

Nevertheless, a volume play through aggressive pricing could put margins under pressure if the products form a major proportion of Oracle’s cloud portfolio over time. Most of the new products in question are PaaS products, which forms a tiny proportion of Oracle’s total revenues. Oracle’s combined revenues from SaaS and PaaS accounted for just 3% of its total revenues in calendar 2014. Therefore, the impact of the latest low-priced products will be negligible on the company’s overall margin. However, the strategy may put pressure on Oracle’s SaaS and PaaS gross margin in the short term. Oracle’s SaaS and PaaS gross margin stood at 52% in calendar 2014, and we currently expect it to achieve a marginal improvement through 2021.

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Notes:
  1. Oracle Press Release, June 22, 2015 [] []
  2. Amazon Pulls Back Curtain on Cloud Business, The Wall Street Journal Tech Blog, April 23, 2015 []