Is Oracle A Better Buy Than IBM?

by Trefis Team
+6.49%
Upside
53.98
Market
57.48
Trefis
ORCL
Oracle
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IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally.  Many companies are also operating with employees working remotely from their own home. Oracle‘s (NYSE:ORCL) stock is down by about 7% since early February, while its rival IBM (NYSE:IBM) has seen its stock drop 26% over the same period. Both companies have seen a contrasting trend in revenues over the last few years, with Oracle’s revenue continuously rising while IBM’s revenue base has been steadily shrinking. Also, over the last 5 years, Oracle’s earnings have increased at 4.7% vs. -2.3% for IBM. Further, the P/E multiple for Oracle has been largely higher than IBM, reflecting better geographic and product diversification for Oracle.

 

The outlook for both companies remains tough, as consumer demand and spending is expected to remain low due to the current pandemic, at least until the time there is confirmation of containment of the virus. Oracle’s P/E multiple (based on FY’19 EPS) has declined by 14%, compared to 28% for IBM, indicating that the market is pricing in the tough outlook for the companies. As revenues and margins are likely to get hurt and P/E has contracted, both stocks could present a buying opportunity. IBM’s relatively higher debt burden (debt to equity of 3x vs about 2.5x for Oracle in 2019) is a concern, whereas Oracle’s improving revenue along with higher earnings and similar cash flow from operations compared to IBM, makes Oracle’s stock relatively more attractive.

Our analysis Is Oracle Corp Expensive Or Cheap After A -7.1% Move vs International Business Machines? compares the stock price performance and fundamentals of Oracle and IBM over the last few years.

Coronavirus Crisis: 

  • Oracle’s stock has declined by about 7% since early February, compared to 26.1% for IBM, after the WHO declared a global health emergency relating to Coronavirus on 31st Jan 2020.
  • Oracle’s stock is one of the few silver linings in the market as it has risen by about 2.8% since March 8th, while IBM has declined by about 17.7%.

Historical Performance:

  • Oracle Corp stock went from $21.52 at the end of 2009 to $52.75 at the end of 2019, representing a change of 145.1%.
  • During the same time period, the International Business Machines went from $96.52 to $132.65 representing a change of 37.4%.
  • This implies that Oracle Corp stock grew at 3.9x the rate of International Business Machines.

Historical Revenue and EPS Growth:

  • Oracle Corp 2014-19 annualized revenue growth of 0.6% is 0.2x that of the 2014-19 S&P 500 annualized revenue growth rate of 3.9%.
  • Oracle Corp 2014-19 annualized EPS growth of 4.7% is 0.8x that of the 2014-19 S&P 500 annualized EPS growth rate of 5.7%.

Conclusion:

  • While the outlook for both companies remains tough, as consumer demand and spending is expected to remain low due to of the current pandemic, at least until the time there is confirmation of containment of the virus, IBM’s higher debt burden and negative growth in revenue and earnings in the past few years, puts Oracle in a better position to tide over the crisis.

 

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