We came away from Oracle's (ORCL) OpenWorld conference and analyst day with new insights into how the company is approaching the secular shift to cloud computing. The most surprising move came in the unveiling of the company’s next-generation infrastructure-as-a-service offering, which management alluded to on its first-quarter conference call last week. Previously, Oracle had been reticent about the idea of competing directly with public cloud behemoths Amazon and Microsoft, but it appears Oracle will address this market full bore moving forward. While this move unlocks new opportunities for Oracle, we maintain our $38 fair value estimate (as we remain skeptical of the IaaS strategy), and we maintain our wide economic moat and negative moat trend ratings.
The bulk of the conversation during Oracle’s analyst day focused around the company’s cloud offerings spanning SaaS, PaaS, and IaaS. In particular, the SaaS and PaaS businesses represent the most developed product offerings for the company and the most readily addressable markets in the cloud. The company has now landed 12,500 SaaS customers (which does not account for the pending NetSuite acquisition), and management highlighted a strengthening pipeline that should yield significant growth over the next several years as enterprises migrate business applications to the cloud more aggressively. The company has 8,000 potential customers in its pipeline (ex-NetSuite), while more than 50% of its SaaS customers are new to Oracle. However, the bulk of the firm’s SaaS customer base remains in the mid-market, and we continue to believe large customers could be at risk of jumping ship to cloud-native SaaS vendors such as Salesforce.com and Workday, which have proven their scalability. Further, the PaaS pipeline is growing (bookings more than doubled between third and fourth quarter last year), which instills confidence the company will not be caught flatfooted when considering the long term for its middleware customers.
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