Since reaching a 52-week high of $46.71, shares of Oracle (ORCL) - Get Report , the world’s second-largest software company, have plummeted some 22%. Now trading at around $36 -- down 19% year to date, as compared to a 1.3% decline for the S&P 500 (SPX) index -- it's tough to ignore how cheaply valued the Redwood City, Calif.-based tech giant has become.
Known for its breakthroughs in databases and for its software that analyzes business intelligence, Oracle has made the cloud its top growth priority, assuring shareholders it would become a central player in cloud-based services to compete with cloud giants Salesforce.com (CRM) - Get Report and Workday (WDAY) - Get Report .
Based on how the market has priced Oracle shares, there seems to be pessimism that Oracle can grow its cloud market share fast enough to merit a higher stock price or a valuation multiple. With fiscal 2016 consensus estimates of $2.60 in earnings per share, Oracle stock is priced at just 14 times those estimates; the average stock in the S&P 500 index is priced at 17 times forward estimates.
This discount extends to the broader software sector, as represented in the iShares North American Tech-Software ETF (IGV) - Get Report -- home to software stocks like Microsoft (MSFT) - Get Report and Adobe (ADBE) - Get Report , which trade at forward P/Es of 19 and 32, respectively. Assuming Oracle traded on par with the rest of the market, it's shares would be priced today at around $44, or 21% higher.
Oracle is an ideal bounce-back candidate for the next 12 to 18 months. Why? As the market continues to discount Oracle's cloud prospects, Oracle's cloud revenue suggests it's on the verge of becoming a formidable cloud player. In its just-ended quarter, for instance, its cloud revenue surged 26% to $649 million. Of that total, Software as a Service and Platform as a Service increased 34% to $480 million. At the same time, revenue from its Infrastructure as a Service business increased 7%.
The market, however, continues to focus on the consolidated revenue number, which declined 6.3% from last year to $9 billion. The lion's share of that decline is due to Oracle's business shift -- moving away from its legacy hardware and database business to higher-margin areas like the cloud. Sure, it's taking longer than investors would like, but with Oracle projecting roughly $1.5 billion in sales to come from SaaS and PaaS for fiscal 2016, the company is making good on its promise.
In short, Oracle stock offers excellent value for relatively low risk. The stock, which has a consensus buy rating, has an average analyst 12-month target of $44. Plus it has a 15-cent quarterly dividend that yields 1.63% annually, and the company is actively buying back its stock. Good luck finding a safer long-term value play in tech.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.