Introduction
An overview on the technology market
The technology sector encompasses businesses involved in the manufacturing of electronics, the development of software, and the provision of IT-related products and services, making it a key area for growth-oriented investments In 2017, this sector demonstrated strong performance, achieving a 15.6% increase since January of that year.
Brexit has negatively impacted the UK technology sector, introducing increased risk and uncertainty for businesses, with a KPMG report indicating that 70% of tech workers are contemplating leaving the UK The sector is primarily led by Apple (AAPL), Microsoft (MSFT), and Facebook (FB), which saw stock returns of 10.8%, 14.8%, and 13% respectively in December 2017 compared to the same period in 2016 These companies operate globally, with sales primarily driven by Europe, Asia-Pacific, and the US in 2017 Despite the challenges, the technology sector is projected to experience explosive growth in 2018, with researchers predicting a potential tripling of demand for tech-related goods and services over the next decade, solidifying its role as a bellwether for the overall stock market and economy.
Area of the study
This dissertation evaluates the intrinsic values of the four largest technology firms: Apple Inc., Oracle, IBM, and Microsoft The analysis emphasizes three key regions—Asia, Europe, and the US—though it primarily focuses on the US, where all four companies predominantly operate.
9 analyses, this study wants to understand deeply the technology sector’s leaders and provide some investment recommendations for investors who have purpose to invest in these companies.
Study objectives
Objectives of this study are having an overview of technology sector and provide investment recommendations
1) Providing current technology sector insights
2) Analysing crucial macroeconomic indicators of the economies in Asia, US, Europe
3) Analysing technology industry in these 3 regions
4) Base on the financial statements, gearing ratios, profitability ratios, investment ratios of Apple Inc., Oracle, IBM and Microsoft are analysed In the next step, this paper uses the valuation models to calculate the intrinsic value of these companies After analysing and assessing the intrinsic value, this project will provide investment recommendations.
Methodology
This project will employ a top-down analysis method, beginning with an economic evaluation of the technology sector that includes macroeconomic and industry analyses By assessing these factors, the project aims to understand the industrial and macroeconomic conditions that are crucial indicators of firms' potential profitability Subsequently, it will analyze the performance of four companies and provide price recommendations based on valuation models.
This project conducts a PEST analysis to assess the political, economic, social, and cultural impacts on key macroeconomic determinants, including inflation, unemployment rate, GDP, exchange rate, and Consumer Price Index (CPI).
Industry analysis: This study illustrates technology sector overview before pointing out the impact of market trends on firms in this industry The determinants affect market competition are analysed also
This study conducts a comprehensive company analysis and valuation by examining the financial statements of four firms, utilizing resources from financial websites such as the IMF, MarketLine, and the World Bank, along with databases like OSIRIS and Datastream It evaluates the profitability and overall financial health of these companies, followed by the calculation and analysis of their intrinsic values Additionally, a SWOT analysis is incorporated to assess the strengths, weaknesses, opportunities, and threats faced by these firms, providing valuable insights into their operational dynamics.
Organisation of the study
This project comprises eight chapters, starting with an introduction to the study area and its objectives Chapter 2 evaluates the recent global economy, focusing on three regions: Asia, Europe, and the US The third chapter analyzes key indicators in the technology industry and the factors influencing market competition, utilizing Porter’s Five Forces as an analytical framework Chapters 4 through 7 provide concise profiles of four selected companies, including their performance assessments and future forecasts, alongside calculations of intrinsic values and investment recommendations Finally, Chapter 8 summarizes the report.
Macroeconomic analysis
Overview of the global economy in 2018
In 2017, the global economy experienced sluggish growth, marked by weak international trade and declining investment, resulting in the slowest pace of world growth since 2010 While 2018 presents a more optimistic outlook, significant uncertainty regarding policy directions in major economies could impact recovery prospects (World Bank, 2018).
The International Monetary Fund (IMF) forecasts a rise in global economic growth from 3.1% in 2017 to 3.5% in 2018, driven by rebounds in investment, manufacturing, and trade This growth is supported by stronger global demand and oil supply restrictions that have led to a recovery in commodity prices Higher commodity prices are helping to alleviate global headline inflation and reduce deflationary pressures Financial markets remain optimistic, anticipating ongoing policy support in China and fiscal expansion in the U.S Short-term growth may exceed expectations due to strong market sentiment In the U.S., manufacturing activity is projected to boost economic growth to 2.3%, a 0.7% increase from the previous year However, rapid interest rate hikes in the U.S may tighten financial conditions and impact emerging economies reliant on external financing Meanwhile, Europe is expected to grow at a healthy rate of 1.7% in 2018, with major economies like Germany, Italy, and Spain projected to grow at 2%.
In the Asia Pacific region, economic growth is projected at 5.5%, though significant uncertainties loom in the near term, with medium-term challenges stemming from a slowdown in productivity growth in several economies The IMF has upgraded China's economic outlook to 6.7%, supported by public investment and expansionary credit policies In Q1 2018, China's economy expanded by 6.9%, surpassing the government's target of 6.5% However, many economists caution that this growth may not be sustainable, as it heavily relies on domestic credit, which could lead to financial stability risks Consequently, China faces the challenge of reducing its dependence on credit growth Overall, global economic growth is expected to accelerate in 2018, driven by a rebound in investment, trade, and manufacturing.
In this chapter, PEST analysis is used to analyse the influences of macroeconomic on technology sector in US, Europe and Asia Pacific
The United States boasts a robust democratic framework characterized by a transparent and fair electoral process, which underpins its effective rule of law This system significantly influences both national and global policymaking, wielding considerable political and economic power However, the U.S faces rising threats from terrorism, a challenge exacerbated by its interventionist foreign policies.
The ongoing 'War on Terror' has resulted in a rise in terrorist attacks and an influx of illegal immigrants Additionally, many of President Trump's policies directly oppose the legacy of President Obama, particularly in the healthcare and pharmaceutical sectors, where Trump may seek to dismantle Obamacare and challenge the entire industry.
The United States boasts one of the world's most advanced economic systems, characterized by robust manufacturing and service sectors In 2017, the real GDP reached $16.81 trillion, reflecting a growth rate of 3.2%, the highest in two years This economic strength is attributed to its diversity and leadership in industries such as automotive, telecommunications, aerospace, electronics, chemicals, and information technology The budget deficit significantly decreased from $1.4 trillion (9.75% of GDP) in 2010 to $587 billion (3.2% of GDP) in 2017, with projections by the Congressional Budget Office indicating a further reduction to $559 billion in 2018 Additionally, the unemployment rate has shown recovery since the Great Recession, dropping to 4.4% in April 2018, the lowest since 2008, following the creation of 211,000 new jobs.
Social analysis: American population has a high standard of living According to the United Nation’s 2016 Human Development Report, US was ranked eighth in 188 countries
The average household net-adjusted disposable income per capita in the US is $41,355, significantly surpassing the OECD average of $25,908 Additionally, 44.6% of American adults aged 25 to 64 hold a tertiary education, compared to 35% in the OECD, reflecting strong educational attainment among US adults However, the country faces a significant challenge with income inequality.
In 2015, the United States ranked as the poorest performer in income inequality among OECD countries, with significant wage gaps persisting between genders and ethnicities Additionally, the nation faces challenges from an aging population, as the baby boomer generation reaches retirement age This demographic shift is expected to strain government budgets, exacerbating the pressures from a declining labor force and increasing demands from older citizens.
Technology plays a pivotal role in driving the US economy, positioning the country as a global leader in scientific publications and emerging technologies A significant portion of its manufacturing and service sectors relies on advanced technological applications.
The United States enhances technology commercialization through a robust system of intellectual property rights protection and enforcement However, challenges arise from intellectual property theft by countries like China, which discourages the US from increasing its investments in research and development (Marketline, 2018).
In the first quarter of 2018, the United States experienced a GDP growth rate of just 0.7%, marking the slowest increase in three years, primarily attributed to weak consumer spending.
Despite a sluggish growth rate, the US economy remains robust, characterized by a low unemployment rate of 4.5%, solid job gains, and increasing wage growth Low gas prices further support consumer spending, which is anticipated to rise due to President Trump's election victory and his commitments to tax cuts and deregulation This combination of factors is expected to drive GDP growth in the coming months.
Inflation rate: According to the US Bureau of Labour Statistic (2018), the US
In May 2018, the US inflation rate, based on the Consumer Price Index (CPI), fell to 1.9%, down from 2.1% in 2017, primarily due to a 0.1% decrease in CPI The energy index played a significant role in this decline, dropping by 2.7% and contributing to a 6.4% decrease in gasoline prices This trend began in April, coinciding with a slip in US personal consumption expenditure to 1.5%, which is expected to remain between 1.5% and 1.7% per quarter throughout 2018.
In April, American industrial production experienced its most significant growth in over three years, with a reported increase of 1% from March, according to the Federal Reserve This rise marks the largest gain since February 2015, as manufacturers and mines rebounded from a downturn in March Factory production rose by 1%, while mine output increased by 1.2% after previous declines Additionally, utility output surged by 0.7% following an 8.2% rise in March Since late 2016, the US manufacturing sector has been recovering, driven by cutbacks in the energy industry and a stronger US dollar, which has made American goods more expensive in foreign markets.
Figure 1: The US Industrial Production in 2017 – 2018 (Source: Federal Reserve) 1.1.1 3 Summary of the US economy:
The US economy remains the largest and most significant globally, characterized by a favorable business environment dominated by service-oriented sectors like technology, financial services, and retail This makes the US market an ideal landscape for the growth and development of technology companies.
Industry analysis Error! Bookmark not defined I Bargaining power of buyers
Bargaining power of suppliers
The bargaining power of suppliers in the technology sector is relatively weak, particularly for leading companies like Apple With a vast array of potential suppliers and an abundant supply of components, Apple enjoys significant flexibility in sourcing parts for its products Additionally, the competitive nature of the supplier industries and the low switching costs further diminish supplier power, allowing Apple to easily transition between suppliers as needed.
Apple's significant purchasing power enhances its negotiation strength with suppliers, as highlighted by Bloomberg (2018) In contrast, IBM, a major competitor, also experiences a weak bargaining power of suppliers due to a high overall supply, which diminishes the impact of individual supplier changes on the broader supply landscape (Rowland, 2018).
Threat of new entrants
The technology industry, while attractive to new entrants due to its rapid growth and appealing customer base, faces significant barriers that limit the likelihood of successful challengers emerging in the immediate future High establishment costs and the need for substantial capital investment in research and development hinder new companies, particularly in sectors like personal computing and smartphones Additionally, these newcomers must contend with fierce competition from established giants such as Apple and Microsoft, making brand recognition a critical challenge in an industry dominated by strong names like Google As a result, the threat posed by new entrants remains relatively low.
Threat from substitutes
Substitute products are alternatives that do not directly compete with a company's offerings, posing a low threat in the technology sector For instance, while a landline phone may serve as a substitute for an iPhone, its limited capabilities compared to the multifunctional smartphone reduce its threat to Apple Similarly, Microsoft faces a low threat from substitutes, as non-online or manual processes generally offer inferior performance compared to its software solutions The global shift towards advanced technologies further diminishes the availability of viable substitutes, weakening the substitution threat for Microsoft Although moderate switching costs may encourage substitution, they are insufficient to significantly enhance the impact of substitutes in this industry.
Rivalry among existing players
The technology industry is characterized by intense competition, primarily due to the rivalry among established giants like Apple, Microsoft, and Amazon These companies heavily invest in research and development (R&D) and marketing, leveraging economies of scale to maintain their competitive edge Their significant resources enable them to effectively promote and sell their well-known products Additionally, the low switching costs for consumers exacerbate the competitive landscape, as it is easy for users to switch from one brand to another without substantial investment Consequently, the threat of competitive rivalry in the technology sector remains high.
Company Analysis
APPLE INC
Apple Inc., headquartered in Cupertino, California, is a global leader in the consumer electronics sector, employing 116,000 people and selling products in 180 countries The company operates in three main segments: products, consumer and professional software applications, and digital content and applications Key products include the iPhone, iPad, Mac, iPod, Apple Watch, and Apple TV, while software offerings encompass iOS, macOS, watchOS, tvOS, iCloud, and Apple Pay In the digital realm, Apple provides services such as the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music In 2017, Apple reported revenues of $215,639 million, a 7.7% decline from 2016, primarily due to decreased iPhone sales and currency fluctuations, though this was partially offset by growth in services The United States remains Apple's largest market, accounting for 35% of sales in FY16, followed by China, contributing 21% of revenue in the same fiscal year.
SWOT analysis
Table 1 : SWOT analysis of Apple Inc
High average selling prices (ASPs)
Robust and extensive distribution channels
High dependence on iPhone and iPad product lines
The global smartphone market has a positive outlook
Smart Wearable Devices market has a rapid growth
High selling price of products could limit the growth of Apple in the emerging markets Lawsuits and Litigations
High average selling prices (ASPs) of Apple Inc
Despite a general decline in average selling prices (ASPs) across the industry, the company's products have maintained stable ASPs Notably, Apple's iPhone, priced at $600, has shown resilience against this downward trend in ASPs Estimates indicate that in FY2017, the iPhone achieved an ASP that further underscores its market strength.
In 2017, Apple demonstrated strong demand for the iPhone, achieving an average selling price (ASP) of $645.2 and selling 78.3 million units in the last quarter alone Despite the challenges posed by developing economies, where consumer goods typically face pricing pressures, Apple's products continue to sustain high ASPs.
Apple Inc.'s robust research and development (R&D) capabilities are a key strength that provides a significant competitive advantage by enabling the launch of innovative products that boost revenue and market share The company consistently invests heavily in R&D, dedicating substantial resources to create consumer-preferred products To maintain a competitive edge in the market, Apple ensures a steady flow of advanced products, services, and technologies This commitment to R&D allows Apple to enhance existing technologies, broaden its product range, and pursue licensing and acquisitions Over the years, Apple has significantly increased its R&D spending, with expenditures of $10 billion in 2017, $8.1 billion in 2016, and $6 billion in 2015 This investment has facilitated the introduction of new products, such as the TV app launched in 2017.
Apple's offerings include access to a variety of TV shows and movies through multiple apps on Apple TV, iPhone, and iPad, enhancing content discovery for users In the same year, Apple unveiled the MacBook Pro, featuring a Retina-quality Multi-Touch display known as the Touch Bar, which replaces the traditional function keys Additionally, Apple introduced the AirPods, advanced wireless headphones, alongside the Apple Watch Series 2, further expanding its innovative product lineup.
Robust and extensive distribution channels
Apple employs both direct and indirect distribution channels to effectively serve customers across various markets, including consumer, small and mid-sized businesses, education, enterprise, and government The company utilizes its retail and online stores, along with a direct sales force, to sell its products and third-party offerings directly to consumers and small businesses To enhance its distribution capabilities, Apple continuously expands its retail presence globally, strategically placing stores in high-traffic shopping malls and urban areas This approach not only ensures a superior customer experience but also attracts new clientele Apple's retail stores are designed to effectively showcase its products, setting it apart from competitors, as few have their own physical stores, and none boast such an extensive network.
High dependence on iPhone and iPad product lines
Apple's revenue is heavily reliant on its iPad and iPhone product lines, which accounted for 73% of total revenues in FY2017 As these products have been key growth drivers for the company, any decline in their growth rates could significantly impact Apple's overall performance Relying on a limited number of product lines increases business risk, particularly in an industry characterized by rapid technological advancements.
33 market share losses of main products could have a material adverse effect on the Apple's growth prospects
The global smartphone market has a positive outlook
The global smartphone market is experiencing rapid growth, with shipments projected to reach 1,530 million units in 2018 and a compound annual growth rate (CAGR) of 4% expected through 2021, resulting in 1,770 million units Apple is significantly benefiting from this growth, as its iPhone remains a market leader, with nearly 211.8 million units sold in FY2017 Sales for Apple are anticipated to continue increasing in the upcoming years.
Smart Wearable Devices market has a rapid growth
The wearable devices market is experiencing significant growth, projected to reach $12 billion by 2023, with a compound annual growth rate (CAGR) exceeding 24% from 2017 to 2023 Apple is capitalizing on this trend, particularly through the successful sales of the Apple Watch.
High selling price of products could limit the growth of Apple in the emerging markets
Apple's pricing strategy presents a significant competitive disadvantage, allowing rivals to capitalize on this gap to increase their market share This challenge is particularly pronounced in emerging markets, which are crucial as smartphone markets in advanced economies reach saturation In these emerging regions, limited carrier subsidies coupled with a price-sensitive customer base further complicate Apple's position.
Apple faces challenges in competing with lower-priced Android products due to price changes, particularly in emerging markets where revenues increasingly come from older models As the smartphone market shifts towards these regions, average prices are expected to decline, affecting profit margins The company has struggled to gain market share in these markets, where budget-friendly phones dominate Consequently, Apple's high pricing strategy may hinder its ability to maintain gross margins effectively.
Apple is currently involved in multiple legal proceedings and may face additional claims in the future In 2017, the company settled a Siri patent lawsuit by paying $24.9 million to Dynamic Advances, allowing it to continue using the virtual assistant on its devices Additionally, Apple paid $626 million to VirnetX after a court found that iMessage, FaceTime, and other software infringed on their patents That same year, Apple incurred $862 million in damages to the University of Wisconsin due to patent violations linked to its A7, A8, and A8X chips used in the iPhone 5S, iPhone 6, and iPhone 6S, which breached a 1998 patent held by the Wisconsin Alumni Research Foundation.
Ratio analysis
This part focuses on analysing three main categories: profitability, gearing and investment ratios These ratios will give an overview of Apple’s financial performance, financial risks and return on investment
Table 2: Profitability ratios of Apple Inc
In recent years, Apple's Gross Profit Margin (GPM) ratio has shown slight fluctuations, peaking at 39.08% in 2016 before declining in 2017 This decline coincided with the company's lowest Net Profit Margin (NPM) in five years, indicating a reduced ability to convert revenue into profit The decrease in profitability ratios suggests inefficiencies in material and labor utilization during production Contributing to this downturn was the strengthening of foreign currencies, which increased the costs of product components Despite these challenges, Apple's profitability ratios, except for Return on Capital Employed (ROCE) and GPM, remain above the industry average, showcasing the company's superior performance, particularly in the smartphone market.
Table 3: Gearing ratios of Apple Inc
The company's debt-to-equity ratio has significantly increased, serving as a key indicator of ownership versus creditor obligations This ratio is calculated by dividing total liabilities by shareholders' equity (Bloomberg, 2018) For instance, Apple had a debt-to-equity ratio of 0% in 2013, highlighting its initial lack of debt.
Over a span of four years, the gearing ratio of Apple increased significantly, reaching 58.81%, highlighting the rapid changes in its capital structure This ratio, which measures investment quality by comparing long-term debt to total equity, rose from 43.09% in 2016 to 47.15% in the fiscal year ending September 2017 This trend indicates that the company has taken on more debt during this period.
2017, gearing ratio indicates it is still in satisfactory financial health
Table 4: Investment ratios of Apple Inc
Despite fluctuations in dividend cover, Apple consistently increased its dividends per share (DPS), demonstrating a commitment to meeting shareholder expectations over maximizing profits In fiscal year 2017, Apple's price-to-earnings (P/E) ratio stood at 13.65, significantly below the industry average While the market appreciates Apple's steady stock gains driven by earnings growth, there are concerns regarding the sustainability of its iPhone-driven expansion, which may prevent investors from assigning a higher valuation premium to its stock.
Valuation
The Price multiples model indicates that the intrinsic value of Apple’s stock is estimated at $146.02 This valuation is derived by comparing the ratios of Apple's primary competitors, including Microsoft Corporation, Samsung Electronics Co., Ltd, and International Business Machines Corporation, to determine the fair value per share for Apple Inc.
Ratio MSFT SAMSUNG IBM Mean APPL
Financial Statement Item Actual Financial
Apple's M/S, M/B, and P/E ratios are lower than those of its key competitors, making its stock more appealing to investors seeking lower market values per dollar of equity With a P/E ratio that suggests potential undervaluation, the current market price of $150.27, as of July 24, 2018, exceeds the target share value of $146.02, indicating that the stock may be overvalued.
The free cash flow model will be discounted at the weighted cost of capital to find out the value of the company
Add in initial cash and mkt securities
Subtract out value of firm's year
Total equity value (in millions) $526,097
By using the free cash flow model, the value per share is lower than the stock’s current price ($150.27 as 24/07/2018) The Apple stock is currently traded as overvalued
D1: expected dividend for Apple Inc share during the year
R: cost of equity g: growth rate of dividend
Value per share is higher than the stock’s current price ($150.27 as 24/07/2018)
Apple's stock is poised to outperform the market, driven by its innovative product launches, robust business model, and technological expertise The company's future success is closely linked to the iPhone, particularly with the positive reception of the iPhone 7 and iPhone 7 Plus As upgrade cycles trend upwards, Apple is strategically positioned to capitalize on growth in mature markets while also expanding its footprint in emerging economies like India, which offers significant potential due to its youthful demographic and enhanced 4G infrastructure This outlook supports a buy recommendation, as Apple is expected to maintain high revenue, improved margins, and strong returns on invested capital.
$188.3 is 25.3% premium above the prevailing share price of $150.27, Apple’s stock is a good investment opportunity
Oracle Corp supplies software for enterprise information management The company offers databases and relational servers, application development and decision support tools and enterprise business applications
Year FY2014 FY2015 FY2016 FY2017 Net Sales
52 weeks high/low $51.85/37.62 Price as of 24/07/2018 $50.35 Share value $41.43 Beta 1.06
JUL 24, 2018 Software- Infrastructure Industry United States SELL $41.43
Oracle is a leading provider of enterprise-grade database, middleware, and application software, having expanded its offerings to include hardware products and services following its acquisition of Sun Microsystems in January 2011 Its comprehensive portfolio features Oracle Database, Oracle Fusion Middleware, and Oracle Engineered Systems, which encompass Exadata Database Machine, Exalogic Elastic Cloud, and more Oracle's solutions are designed for both on-premises and cloud environments, with a strong focus on cloud computing in recent years The Oracle Cloud platform, built on open standards like SQL, Java, and HTML5, offers subscription-based access to application, platform, and infrastructure services, while Oracle Enterprise Manager facilitates effective management of cloud environments.
In fiscal 2018, Oracle achieved impressive revenues of $37.90 billion, reflecting a significant shift in its reporting format during the fourth quarter The company's cloud revenue experienced remarkable growth, soaring 68% in constant currency to reach $4.74 billion Overall, software and cloud revenues totaled nearly $30.40 billion, marking a 6% increase in constant currency, with recurring revenue comprising $24 billion, or 79%, an increase from 75% the previous year.
Table 5: SWOT analysis of Oracle Corp
Strong software and cloud business
Increasing adoption of cloud computing services
Positive outlook for mobile computing market
Foreign exchange currency risks Intense competition
Strong software and cloud business
Oracle maintains a robust software business that generates a steady stream of recurring revenue, solidifying its position as a global leader in the database software market, with a revenue share significantly surpassing that of its four main competitors combined Additionally, Oracle excels in the application software and middleware sectors Transitioning from a traditional software vendor to a cloud-focused company, Oracle's software and cloud revenue comprised 76%, 77%, and 78% of total revenue in 2014, 2015, and 2016, respectively The company benefits from high software renewal rates, primarily serving medium-to-large businesses, including those in the Fortune 1000 Many IT departments within these organizations allocate considerable resources to optimize their Oracle software, with numerous staff members becoming proficient through hands-on experience and formal certification programs In FY2016, Oracle's software support margins reached 91%, contributing to 86% of its total margins for that period.
Oracle's robust growth is driven by rising demand for software products and subscription services, alongside increased renewals of software license updates and product support contracts The company's thriving software and cloud business significantly contributes to its success, offering a wide range of products and services.
45 subscription basis would ensure a continuous revenue inflow stream over the years Additionally, it offers a strong recurring revenue base which allows Oracle to aim at future growth investments
Diversified geographic presence and customer base
Oracle boasts a robust global presence, operating in over 145 countries and expanding into emerging markets across Asia Pacific, Latin America, the Middle East, and Africa The company serves a diverse customer base of more than 420,000 clients, including all Fortune 100 companies Its clientele features 10 of the top 10 aerospace and defense firms, as well as the leading 20 global airlines, insurers, automotive manufacturers, banks, governments, telecommunications providers, high-tech companies, SaaS vendors, medical device manufacturers, oil and gas corporations, pharmaceutical firms, retailers, supply chains, universities, and utilities.
Oracle's diversified geographic presence and extensive customer base minimize reliance on any single country or client, fostering robust growth in its target markets.
Oracle is highly indebted In 2017, the company had $43.9 billion of outstanding indebtedness which include $37.8 billion of fixed rate borrowings, $2.3 billion of floating rate borrowings and
$3.8 billion of short term borrowings under a revolving credit agreement (Oracle annual report,
Between 2017 and 2055, Oracle's debt is set to mature, and the company may incur additional debt in the future There is no guarantee that Oracle will effectively manage these financial risks, and it may need to refinance some of its existing obligations.
Oracle faces significant risks related to its outstanding debt, particularly as it matures The company may struggle to refinance this debt under favorable terms, especially if prevailing interest rates increase, leading to higher interest expenses Additionally, any negative changes in Oracle's credit rating or outlook from rating agencies could further diminish the value of its debt and equity securities, potentially increasing future interest payments This high level of indebtedness could restrict Oracle's strategic options, adversely impacting its financial health and overall operations.
Increasing adoption of cloud computing services
The demand for cloud computing services is expected to rise significantly in the coming years, driven by companies seeking to cut costs related to licensing, upfront royalties, hardware investments, and operational expenses Public cloud Infrastructure as a Service (IaaS) spending is projected to grow at a compound annual growth rate (CAGR) of 16%, reaching $173 billion by 2026 Additionally, the Software as a Service (SaaS) and Platform as a Service (PaaS) segments are also anticipated to expand at a CAGR of 16%, totaling $55 billion by 2026 From 2016 to 2019, global spending on public cloud services is forecasted to increase at a CAGR of 19.4%, rising from $70 billion in 2016 to over $141 billion in 2019, according to Oracle’s annual report.
Oracle holds a strong position in the cloud computing market, providing a comprehensive range of enterprise-grade software and hardware solutions The company delivers its products and services for both private and public cloud environments on a subscription basis, ensuring they are hosted, managed, and supported by Oracle.
The company has been expanding in the cloud computing business to leverage the increasing adoption of cloud computing services by the customers
Increasing adoption of cloud computing services, the company’s strong portfolio of cloud products and services will provide Oracle opportunity to gain more customers and raise its revenues
Positive outlook for mobile computing market
The mobile computing market is experiencing significant growth, driven by the rising adoption of smartphones, tablets, and mobile applications The mobile cloud market is projected to surge from $9.5 billion in 2016 to over $38 billion by 2020, representing an impressive CAGR of 26.3% Additionally, it is anticipated that by 2020, the number of cloud-ready devices will exceed one trillion This expansion presents a valuable opportunity for Oracle to address the growing customer demand for mobile applications and enhance its revenue growth moving forward.
Oracle's revenue and operating income are significantly affected by fluctuations in foreign currencies against the US dollar, as a large portion of its earnings comes from international markets For example, in FY2016 and FY2015, Oracle faced foreign currency losses linked to its Venezuelan subsidiary, which was impacted by the country's designation as a highly inflationary economy and the devaluation of the Venezuelan Bolivar Future volatility in foreign currency, particularly if the Venezuelan government devalues its currency again, poses an uncertain risk to Oracle's financial results.