A BARGAIN TECH INVESTMENT
At Lentus, we continue to have a significant portion of our client capital exposed to high-quality global technology companies. Our bottom-up analysis has identified yet another opportunity in the sector, in the form of software giant Oracle. This has long been a company on our ‘would love to own but it’s too expensive’ list. A combination of recent share price weakness, along with growth in the underlying value of the company, now f inally provides an attractive entry point in our opinion.
Oracle may not be well known to all but the most hardened techies, but its software powers the vast majority of global corporations and indirectly affects much of our daily lives. It holds a dominant position in the database sector (the software used to store and manage the mammoth amounts of data that companies use to manage their businesses) – with nearly 50% of the market and a larger share than its next four biggest competitors combined! Oracle has leveraged this strength to add a number of software applications onto this underlying infrastructure, further tying clients into its products – from which it derives hefty licensing fees.
The mission- critical nature of its products means t hat companies are very wary of switching to some of the cheaper (or even free) versions that have been available for many years. This high switching cost is at the core of our investment thesis and why we think this is such a wonderful company. By locking customers in, Oracle is able to garner significant pricing power and earn superior returns on capital over time. This is the key barrier to entry that we so often refer to in companies that we invest in.
Usually a business such as this trades at a significant premium, meaning that investment returns are often poor despite the characteristics and success of the underlying business. However, a recent slowdown in Oracle’s stellar history of revenue growth has scared off many of the growth/momentum investors (the share price dropped by 10% in one day after a recent results presentation).
Concerns about the increasing number of innovative competitors has hit senti ment and the market is predicting that Oracle’s superior profitability is coming to an end. Competition and innovation have always been a part of the tech sector, but we are comfortable t hat Oracle possesses a strong enough competitive moat to maintain its levels of profitability. Recent deals with leading ‘ cloud’ competitors l ike Salesforce. com and Microsoft have allayed much of our concerns about where it would fit into the changing landscape.
As always, the future is impossible to predict. However, the pricing fundamentals of Oracle discount a very bleak future and shift the odds strongly in the favour of the investor. At a multiple of around 10 times free cash f low, the investor is getting access to this great company at a large discount to the broader market. Even if Oracle’s growth does stagnate going forward, one can still earn a satisfactory return on capital. In addition, the company has a net cash pile of over $16bn, further increasing the investor’s margin of safety.
Oracle headquarters, USA