Impressive collaboration with leading companies over the years, increasing investments, and growing dependence on technology solutions have allowed big tech companies to advance their portfolios and gain wide market reach worldwide. Moreover, the continued digitization at a rapid pace since the onset of the pandemic helped big tech companies profit significantly and attract investor attention. Although the broader tech industry has witnessed a massive sell-off lately on concerns over the rising interest rates and deepening supply chain issues, the largest tech companies should not see as much of an impact on their growth given their wide moat.
Oracle Corporation (ORCL) and Alphabet Inc. (GOOGL) are two of the prominent leaders in the technology industry. ORCL provides products and services that address all aspects of corporate IT environments, including application, platform, and infrastructure worldwide. The company operates through cloud services and license support; cloud license and on-premises license; hardware; and services segments. It sells its solutions directly to businesses in various industries, government agencies, educational institutions, and indirect channels. GOOGL provides web-based search, maps, software applications, mobile OS, consumer content, enterprise solutions, commerce, and hardware products worldwide. The company operates through Google Services; Google Cloud; and Other Bets. It also provides performance and brand advertising services.
GOOGL is down 15.6% year-to-date and ORCL is down 13.76% in the same time period. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On May 5, 2022, popular natural-gas-focused midstream operator Williams Companies (WMB) selected ORCL’s Oracle Fusion Cloud Enterprise Resource Planning (ERP) to move its finance and operations to the cloud. This will help WMB automate and manage key financial data on a single, highly secure, and scalable cloud platform and provide real-time insights and control over costs and reduce its own energy consumption with SaaS. This should nurture ORCL’s relationship with WMB in the long run.
On March 8, 2022, GOOGL’s Google LLC technology company agreed to acquire Mandiant, Inc. (MNDT), a dynamic cyber defense and response leader, in a $5.4 billion all-cash transaction. As the need for advanced cybersecurity rises, MNDT’s acquisition should complement Google Cloud’s existing strengths in security and help organizations combat cybersecurity challenges.
Recent Financial Results
ORCL’s revenues for its fiscal 2022 third quarter ended February 28, 2022, increased 4.2% year-over-year to $10.51 billion. The company’s non-GAAP operating income came in at $4.81 billion, indicating a marginal rise from the prior-year period. While its non-GAAP net income decreased 11% year-over-year to $3.38 billion, its non-GAAP EPS decreased 2.6% to $1.21. As of February 28, 2022, the company had $22.68 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended December 31, 2021, GOOGL’s revenues increased 23% year-over-year to $68.01 billion. The company’s income from operations came in at $20.09 billion, indicating a 22.3% year-over-year improvement. Its net income came in at $17.93 billion, representing a 9.1% rise from the year-ago period. GOOGL’s EPS fell 6.4% year-over-year to $24.62. As of March 31, 2022, the company had $20.89 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, ORCL’s revenue and EBITDA have increased at CAGRs of 2% and 5.1%, respectively.
ORCL’s EPS is expected to increase 1.7% year-over-year in fiscal 2022, ending May 31, 2022, and 10.7% in fiscal 2023. Its revenue is expected to grow 4.4% in fiscal 2022 and 5.7% in fiscal 2023. Analysts expect the company’s EPS to grow at a 10.2% rate per annum over the next five years.
GOOGL’s revenue and EBITDA have increased at CAGRs of 23.9% and 30.7%, respectively, over the past three years.
Analysts expect GOOGL’s EPS to decline 0.6% year-over-year in fiscal 2022, ending December 31, 2022, and 19.4% in fiscal 2023. Its revenue is expected to rise 16.1% year-over-year in fiscal 2022 and 15.4% in fiscal 2023. Analysts expect the company’s EPS to grow at a 17.1% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, ORCL is currently trading at 1.69x, 61% higher than GOOGL’s 1.05x. In terms of forward EV/Sales, GOOGL’s 5.94x compares with ORCL’s 4.83x.
Profitability
GOOGL’s trailing-12-month revenue is almost 6.5 times ORCL’s. However, ORCL is more profitable, with a 79.4% gross profit margin versus GOOGL’s 56.9%.
Furthermore, ORCL’s levered free cash flow and ROE of 22.6% and 1060.3% compare with GOOGL’s 19.6% and 30.8%, respectively.
POWR Ratings
While ORCL has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, GOOGL has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
In terms of Quality, both GOOGL and ORCL have been graded a B, which is consistent with their higher-than-industry profitability ratios. ORCL’s 79.4% trailing-12-month gross profit margin is 57.2% higher than the 50.5% industry average. GOOGL has a 56.9% trailing-12-month gross profit margin, 11.8% higher than the 50.9% industry average.
ORCL has been graded a B for Stability, which is in sync with its lower volatility compared to the broader market. ORCL has a 0.83 beta. GOOGL’s C grade for Stability is consistent with its higher volatility. GOOGL has a 1.06 beta.
Of the 156 stocks in the Software - Application industry, ORCL is ranked #17. In contrast, GOOGL is ranked #7 of 72 stocks in the Internet industry.
Beyond what we have stated above, our proprietary ratings system has also graded GOOGL and ORCL for Sentiment, Value, Momentum, and Growth. Get all GOOGL ratings here. Also, click here to see the additional POWR Ratings for ORCL.
The Winner
Superior market reach, pricing power, and continued innovations should help GOOGL and ORCL perform well despite market disruptions and the possibility of the economy slipping into recession. However, higher profitability makes ORCL a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Software - Application industry, and here for those in the Internet industry.
ORCL shares were trading at $72.11 per share on Thursday afternoon, down $3.10 (-4.12%). Year-to-date, ORCL has declined -16.68%, versus a -13.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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