Business Overview

🎯Key Metrics

Total: 1.5/17

• +2 ✅✅ Projected Operating Margin: 37.59%
• +2 ✅✅ Projected 5-Year Revenue CAGR: 30.67%
• +0 ⚠️ Last 5-Year ROIC: 9.00%
• -2 ❌❌ Estimated Cost of Capital: 12.00% (greater than ROIC)
• +0 ⚠️ Last 5-Year Shares Outstanding CAGR: +0.00%
• +2 ✅✅ Projected 5-Year EPS CAGR: 26.79%
• +0 ⚠️ Projected 5-Year Dividend CAGR: 4.92%
• +0.5 ✅ Moody’s Debt Rating: Baa2
• -1 ❌ Morningstar Moat: Narrow
• -2 ❌❌ Morningstar Uncertainty: Very High

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projecting the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/S – we assume mean reversion to the historical P/S values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical P/E – we assume mean reversion to the historical P/E values.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s provided a rating for the company I used it as the debt rating.

Cost of Capital: 12.00%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 36%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and used the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming its Cost of Capital begins at its current estimated value and then gradually converges to the industry average;
• Initial and Terminal Tax Rate – I’m assuming it starts at its recent averages and then gradually converges to the industry average.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 208.27 dollars for Oracle.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Oracle seems to be fairly valued or at most a little overvalued given that its current price of 184 dollars is a little below P80. From these simulations we can extrapolate that there’s around ~80% probability of Oracle being overvalued and ~20% probability of being undervalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 26%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 28 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Oracle that is currently priced at 184 dollars seems to be undervalued being currently valued well below P10. From this we can extrapolate that there’s more than 90% probability that the stock is undervalued.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/S (Weight: 18%)

The current P/S (Price / Sales) ratio is above its 10 Year average. This means that the company is overvalued by this metric. Assuming a mean reversion to its historical average of 5.78 we can assume a fair value of 117.47 dollars.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical EV/EBITDA (Weight: 11%)

The current EV/EBITDA (Enterprise Value / Earnings Before Interests, Taxes, Depreciation and Amortization) ratio is above its 10 Year average. This means that the company is overvalued by this metric. Assuming a mean reversion to its historical average of 16.52 we can assume a fair value of 124.30 dollars.

Historical P/E (Weight: 9%)

The current P/E (Price / Earnings) ratio is above its 10 Year average. This means that the company is fairly valued by this metric. Assuming a mean reversion to its historical average of 29.98 we can assume a fair value of 174 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I would start buying or adding to my Oracle position around the 161.58 given the fact that I need to investigate a little further into this company and given its very high uncertainty at the moment.

Overall it seems Oracle is fairly valued at the moment.

Fair Value: 192.59 dollars