Oracle is Taking Amazon Head On in the Cloud

It's important for investors looking at the tech sector to take note of the three-way battle for cloud computing supremacy between Amazon's (AMZN) Web Services (AWS), Microsoft's (MSFT) Azure and Alphabet's  (GOOGL) Google that is about to hit critical mass.

Larry Ellison's Oracle (ORCL) , emboldened by its NetSuite acquisition, is bringing the heat on Amazon, issuing claims that its cloud software has stronger performance and better cost management compared to AWS.

It may be true that AWS' footprint and revenue streams are strong at this time, but the cash-rich Oracle could use pricing strategies in an attempt to grab a major portion of the market and unwittingly push lower margins for all players.

AWS has literally changed the game for the sector while supporting Amazon's e-commerce arm, so any shift in profit margins could have large ramifications for the company's bottom line.

For database software kingpin Oracle, the cloud is its biggest opportunity, and possibly, the final frontier.

In the third quarter of 2016, Oracle reported cloud software as a service (SaaS) and platform as a service (PaaS) revenues of around $1 billion, up 73% compared to the same quarter in the prior year. Oracle then could reach the $4 billion mark for its cloud software segment in 2017.

By comparison, AWS' revenues were $12.2 billion last year, helping boost Amazon's overall operating income by $3.1 billion. JPMorgan analysts suggest that Microsoft's Azure revenues for 2016 were $2.7 billion.

And Google is jostling for space between Azure and AWS. Alibaba's (BABA) Ali Cloud came into operation 3 years after AWS and may have attracted attention, but it still isn't a major threat in the U.S.

Oracle's biggest obstacle will be finding its niche in this highly complex terrain.

Remember each is a massive contender, including Google, which is armed with a $2 billion contract with Snap (SNAP) . As Oracle's new licensing business declines, cloud services are the company's best hope for driving sales.

While Amazon's tech may be a little out of date, Oracle must quickly grab market share by leveraging the cost advantages of its infrastructure services.

Experts also believe that Amazon's ability to cross-sell its database management software, along with its efficient pricing model, are key weapons in its armory. Reports say Amazon's prices are potentially 50% lower than purchasing directly from Oracle.

Clearly, Oracle must match Amazon's pricing. That claim about cutting edge cloud offerings only seem to hedge the pricing question.

Eventually, investors will be able to understand if Ellison's strategy can drive real value and sustain its slick revenue growth and customer grabbing trends. The cost of that growth will most definitely impact margins.

Any potential price war would hurt bottom lines across the board for AWS, Microsoft Azure, Google Cloud and Oracle.

Obviously, it would have repercussions on valuations as well.

At this time, Oracle trades at 16.3 times forward earnings, a sharp discount to nearly 20 times of Microsoft and 21.6 times for Google owner Alphabet.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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