Oracle’s (NYSE: ORCL) stock price rallied sharply after Barrons article pointed 33 year’s old company’s potential to thrive in cloud markets, and hinted that Oracle is on the path of completely transforming its business model like Adobe (NASDAQ: ADBE), Autodesk (NASDAQ: ADSK), and Microsoft (NASDAQ: MSFT) from old software license business.
Oracle has aggressively been investing both in organic growth opportunities and acquisitions to expand its cloud business.
The impact of investments in high profitable cloud business has started reflecting on its top line. However, investors are not fully optimistic whether Oracle has the potential to beat the market competition and grow its revenue at a double-digit rate.
Slower revenue growth could limit Oracle stock gains
Shares of Oracle underperformed in 2020 despite historic growth in tech stocks. This is mainly because of slower revenue growth. The company has generated only 2% year over year revenue growth in the latest quarter compared to sharp growth in the overall marketplace.
According to data from Synergy Research Group, the cloud infrastructure market hit $129 billion in 2020 from $97 billion in the past year.
The big players, including Amazon (NASDAQ: AMZN), Microsoft, and Google (NASDAQ: GOOG), have been capitalizing on increasing demand for cloud services. Microsoft’s market share came in at 20% at the end of 2020, while Google and Alibaba’s (NYSE: BABA) market share stood around 9% and 6%, respectively.
Meanwhile, Oracle’s market share hovered close to 3% of the public cloud services market in 2020. Its investments in growth opportunities are also lagging behind the top players. Microsoft has invested almost $12 billion in cloud infrastructure-related activities in 2020 relative to Oracle’s spending of just over $500 million.
The company expects to generate low mid-single-digit revenue growth for the March quarter. Although Oracle’s stock price looks undervalued based on price to earnings ratio of 14, slower revenue and earnings growth are among the headwinds for share price gains.