Oracle Corporation in the Technology Sector and Software Industry

For this discussion I chose to analyze Oracle Corporation, in the technology sector and software industry. According to GuruFocus, as of April 19, 2022, Oracle’s weighted average cost of capital is 6.31%. The company’s WACC is within the lower half of the distribution for both the industry and sector, indicating it is well-positioned as compared to its nearest competitors. For example, Adobe Inc. is the competitor with the closest market cap to Oracle, and its WACC is currently higher than Oracle’s at 7.65%. Further, Oracle’s return on invested capital (ROIC) is 10.72%, meaning it generates higher returns on investments than it costs to raise the capital needed for those investments (GuruFocus, n.d.)
As of the third quarter for fiscal year 2022, Oracle reported a revenue increase year over year of 4%, the majority of which has been driven by increased revenue in its cloud services and licenses (Zacks Equity Research, 2022). Oracle has benefitted significantly from the COVID-19 pandemic, as more businesses have recognized the benefit of cloud-based applications to combat challenges stemming from the pandemic like mandatory remote work (Aggarwal, 2021). Additionally, Oracle is in the process of acquiring Cerner Corporation, which will bolster its position in the healthcare industry, another sector that has seen significant growth as a result of the pandemic (Zacks Equity Research, 2022).
One significant risk to Oracle’s WACC is nationwide interest rates. As of March 2022, the US inflation rate has risen to 8.5%, which is the highest rate since December 1981 (Trading Economics, 2022). Analysts have indicated this may be the peak of the inflation increases, but significant challenges remain that may further impact inflation, such as the war in Ukraine, supply chain bottlenecks, and increased consumer demand (Trading Economics, 2022). This uptick in inflation will lead to higher nationwide interest rates, even with intervention from the Fed, which will in turn make it more expensive for companies like Oracle to obtain capital. Interest rates, as well as market risk premiums and tax rates, are factors influencing WACC that are beyond managerial control, so Oracle should continue to focus on the factors it can control, including its policies for capital structure, dividends, and investments (Brigham & Ehrnhardt, 2017, p. 402).