Why We Added Oracle (ORCL) and DuPont (DD) to Our Portfolio
During our August Monthly Meeting, we decided to add Oracle (ORCL) and DuPont (DD) to our portfolio. We believe both stocks have strong growth potential and offer attractive valuations.
Oracle’s Emergence as a Cloud Infrastructure Name
We initiated our Oracle position on Tuesday. The business software giant is emerging as a cloud infrastructure name that has really come on as of late. For years, Oracle lagged behind the likes of Amazon Web Services, Azure, and Google Cloud, but the company hit a turning point when it launched its second-generation cloud infrastructure offering, called Oracle Cloud Infrastructure Generation 2, or OCI Gen 2, in the summer of 2020. Oracle says it’s faster, cheaper, and more secure than the competition.
Oracle’s Strong Cloud Results and AI Momentum
Oracle has been posting strong cloud results for the past year, but its latest quarter was such a standout. Total cloud revenue growth surged to 54%, with 45% growth for Cloud Applications and 76% growth for Cloud Infrastructure. The company expects cloud revenue, excluding contributions from its Cerner acquisition, will continue growing at least at a similar rate to what it experienced in fiscal 2023. With its high-growth cloud revenues becoming a larger portion of the total business, Oracle should see an acceleration in total revenue growth in fiscal 2024.
One of the great parts of the Oracle story is that investors are paying for this growth at a very reasonable price. Oracle currently trades at around 20.5x the $5.59 analysts expect it to earn in its fiscal 2024. Those earnings are expected to grow about 13% to $6.31 for fiscal 2025. Let’s compare that to Microsoft. It trades at about 29 times the $11.02 per share that that company is expected to earn in its fiscal 2024. Those earnings are expected to grow about 15% to $12.72 for fiscal 2025. I’m not suggesting Oracle and Microsoft (MSFT) should trade at parity, but you are paying for nearly the same amount of growth at a discounted multiple. Plus, Oracle pays a dividend that yields about 1.2% and that’s more than you’ll get from other cloud players.
DuPont: A Cheap, Industrial Play on Semiconductor and Electronics Recovery
We called up DuPont from the Bullpen on July 22. The specialty chemical company is run by the legendary deal maker Ed Breen. What got us interested in this name is that it’s a cheap, industrial way to capitalize on the recovery in the semiconductor and electronics industries without paying a typically higher chip-stock multiple. With interest rates on the rise and the Federal Reserve expected to stay higher for longer, multiples must be scrutinized. DuPont said on its second-quarter earnings conference call that the bottom in its semi-business is here, making for an attractive growth story in 2024 as we see a rebound in electronic sales.
The Attractive Valuation of Oracle Compared to Microsoft
On valuation, Dupont has been trading at a discount to other multi-industry companies for such a long time but we think the time is right to re-rate higher. In the years after DuPont separated from DowDuPont, Ed Breen has been reshaping its portfolio, selling out of its commodity-linked businesses and buying up other companies with stronger, less cyclical growth outlooks, especially in electronics. This transition out of boom-bust cycles to stable growth is deserving of a higher multiple.
With the addition of Oracle (ORCL) and DuPont (DD) to our portfolio, we believe we have found two strong growth opportunities at attractive valuations. Oracle’s emergence in the cloud infrastructure market and its strong cloud results and AI momentum make it an appealing investment. Meanwhile, DuPont offers a cheap, industrial play on the recovery in the semiconductor and electronics industries. With the bottom in its semi-business already here, DuPont has an attractive growth story for 2024. Both stocks have the potential to generate significant returns for our portfolio.
Analyst comment
Positive news. Analyst’s prediction: The addition of Oracle and DuPont to the portfolio provides strong growth opportunities at attractive valuations. Oracle’s emergence in the cloud infrastructure market and its strong cloud results make it appealing, while DuPont offers a cheap, industrial play on the recovery in the semiconductor and electronics industries. Both stocks have the potential to generate significant returns for the portfolio. Expect an increase in market demand for these stocks.
