How Sensitive Is Oracle’s Stock To Changes In Its SaaS Market Share?
In recent years, Oracle (NYSE:ORCL) has witnessed strong revenue growth for its Cloud Services segment, which include SaaS (Software-as-a-Service), IaaS (Infrastructure-as-a-Service) and PaaS (Platform-as-a-service) revenue streams. While revenues from on-premise software deployment have slowed down in recent years, the cloud segment has thrived. Oracle’s SaaS revenues have grown at a CAGR of 45% from 2012 through 2017. In the same period, the global SaaS market grew at a CAGR of 26% to become a $46.3 billion market in 2017. Consequently, the company’s implied share in the combined market went up from 3% in 2012 to almost 7% in 2017. Cloud SaaS revenues have continued to increase at a rapid pace in the current fiscal year. Cloud SaaS revenues are up 58% to $2.2 billion through the first two quarters of FY’18 ended May. We forecast the company to continue to gain share in the SaaS market in the coming years.
Oracle has taken significant steps to battle competition in the SaaS space. The company recently announced its intention to add machine learning and artificial intelligence capabilities to all its SaaS offerings. In recent quarters, Oracle has reported that the company has not only transitioned its on-premise customers to the cloud, it has also added new customers for its SaaS offerings. This indicates a shift in customer preferences from competing players to Oracle.
Needless to say, Oracle’s ability to outpace industry growth and increase its share in the market is important for its valuation. We have created an interactive model that details how changes in its SaaS market share can impact the company’s value. You can modify assumptions such as global market size or projected market share to see how the EPS or estimated valuation changes. The image below shows one of the key steps in identifying Oracle’s stock sensitivity to change in its market share. We detail how change in share impacts revenue, which then impacts EPS and subsequently the valuation (assuming the P/E multiple doesn’t change).
We currently forecast Oracle’s market share to increase by from an estimated 7% in 2017 to just over 10% in 2018. However, given the strength in SaaS adoption and a robust demand for Oracle’s SaaS offerings, the company’s share could increase further through 2018. We find that an additional 1.5% increase in Oracle’s share in the $55 billion global SaaS market would imply a 2.5% upside to its near-term valuation, which we estimate using projected EPS and a forward P/E multiple. Our sensitivity analysis assumes that the increase in market share would not impact Oracle’s forward P/E multiple, which currently stands at 18.6 based on Trefis estimates (P/E based on Non-GAAP EPS). However, if you disagree with that assumption, you can make changes to all input variables on the interactive dashboards platform to gauge the impact of all changes on our price estimate and EPS.
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