Why Is Oracle’s Stock Up 45% In Last 3 Years Despite Only Modest Revenue Increase?

by Trefis Team
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Would you expect the stock of a company, that barely saw 7% increase in revenue in 3 years, to go up 45% during the same period? That’s exactly the story of Oracle (NYSE:ORCL). So what really happened? Investors didn’t really change their perspective of Oracle’s future growth, which is probably the reason why the P/E ratio largely remained unchanged, except for distortion in 2018 when Oracle took one-time charges pertaining to change in the Tax rules. However, margin improvement came to the aid of modest revenue growth, leading to stock price increase. While we talk about that, the significant role of a 14% decline in outstanding share count cannot be ignored. Our dashboard Why Oracle Corp stock is up 44.7% between 2016 and 2019 even though revenue increased 6.6% ? summarizes key factors that drove Oracle’s stock over the past 3 years.  

Increased Profitability 

Between 2016 and 2019, Oracle’s EPS jumped from $2.11 to $3.05, implying an increase of 45%. While revenue increased 6.6%, net income margin increased 16.8% and share count decreased -13.9%. It is clear that it was margin increase and share count reduction that influenced stock price growth the most.

Margin improvement was driven by slight efficiency in cost of revenue and reduction in R&D costs as % of revenue.  In addition, a significant decline in tax rate, which fell from 22% to 10%, was another key factor. However, is tax rate really worth talking about considering that it does not reflect operational efficiency and fluctuates across time periods? In case of Oracle, yes. Like other technology companies, Oracle benefited from US tax reforms not only because a lower tax rate would be applied to its operating earnings, but also because it held a huge amount of cash oversees that could be repatriated at lower cost to distribute among shareholders. Thus, margin improvement was accompanied by an increased valuation of Oracle’s cash pile. This, in part, helped sustain the P/E ratio despite slow topline growth.

Stock Buyback Binge Reduced Outstanding Share Count

In 2019, Oracle spent nearly $36 billion in share buybacks, which was more than the combined amount it spent in the previous 4 years. This reduced share count significantly and partially fueled the growth in its stock. As mentioned before, what additionally changed was that now, this share buyback could be financed more cheaply because of the tax reforms. Another way to look at it is that historically, Oracle had piled on debt to finance its share buybacks which increased its liability but this got countered with lower tax rates as effective cash (asset side) increased in Oracle’s books.

Overall, it appears that if you are an Oracle investor, you can potentially continue to benefit from its massive share repurchase program. While the company has already spent a huge amount, it did not shy away from announcing another $15 billion buyback program in March 2020 amid pandemic concerns.

While Oracle showed unexpected stock growth of 45%, here is another company that dwarfs that achievement. Find out  How Verisign managed 150% stock price growth despite a revenue growth comparable to Oracle’s Hint: It is not so much about tax rates in this case.

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