The two cloud-centric companies reported their most recent quarterly results earlier in March, and the headline news was just short of inspiring in both cases. Salesforce gave first quarter guidance that lagged consensus estimates, while Oracle reported weak sales growth, with a previously expected pick-up in the second half of fiscal 2019 not materializing. Both stocks wobbled following the release of their financial results, with Oracle falling by as much as 3% and Salesforce dipping 5% intraday.
With Salesforce.com and Oracle shares having both regained their footing since their earnings reports, which of them might be the most compelling cloud play at current levels?
Reasons for Favoring Salesforce.com
Salesforce.com was born a cloud service provider, as reflected in its "no (legacy) software" mantra. As a result, the company has much less of a learning curve to conquer than Oracle, which has been trying for several years to steer the large ship that is its business model away from on-premise licenses.
This could be the key reason why Salesforce has become more relevant in the CRM and digital commerce space, as it steals market share away from the once-dominant Oracle and SAP (SAP - Get Report) . In 2018, Salesforce controlled around 40% of the sales force and customer service applications market.
Perhaps the main and most convincing argument against an investment in Salesforce is its rich valuation. The stock trades at a multiple of nearly 60x current-year earnings on expected fiscal 2020 EPS growth of 25% -- a hefty price tag for investors that might be concerned about an overstretched equities market. Yet, the company has bold plans to double its revenue by fiscal 2023, perhaps making the stock look like a bargain at $165/share.
Reasons for Favoring Oracle
Oracle has been doing what it can to retain market relevance, taking advantage of legacy-to-cloud conversions to remain an important player in businesses like ERP, while challenging large cloud infrastructure leaders Amazon (AMZN - Get Report) and Microsoft (MSFT - Get Report) . But the evolution has been slow, with cloud estimated to represent only about 20% to 25% of software sales in the most recent quarter.
The good news is that the Redwood City, California-based company has proved adept at improving margins, generating cash flow and returning capital to shareholders. Oracle's five-cent dividend increase announced in March represented the largest bump in payments to shareholders since fiscal 2013. Better yet, the stock's current-year P/E multiple of 15.5x looks very modest, albeit on projected EPS growth of only 9% next year.
Oracle, therefore, may seem more appealing than Salesforce for a specific sub-segment of value-oriented or income-seeking investors.
The favorable secular and long-lasting trends in cloud services are most likely to make winners out of the bolder, higher-growth players that are better able to capture a bigger slice of a growing pie. In this context, Salesforce appears to be much nimbler than Oracle and better positioned to sustain its double-digit revenue growth rates going forward. The San Francisco-based tech company is still in the early innings of ramping up its platform, marketing and commerce cloud offerings, each of which has been growing organically at a pace of at least 30% year-over-year.
Oracle seems to be executing well on its less ambitious strategy (i.e., a slow transition away from its legacy hardware and software businesses), and the stock's de-risked valuation may draw the attention of more conservative investors. But with respect to total long-term return on investment, it seems more likely that a bet on Salesforce at current levels should lead to better results, given the company's more encouraging prospects.
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