Over the past few weeks, we have spent some time refining our valuation of Oracle, focusing in on what we consider one of the most important factors in the company’s valuation: compensation-related stock issuance.

We published several articles detailing our recent conversation with Ken Bond, Oracle’s head of Investor Relations, about the issue of stock issuance. From what we can see, the firm is improving its policies related to share compensation. The next few years may see increased compensation due to an option issuance overhang from prior years, but it looks as though, once shares related to these options are issued, share issuance will drop. This change is updated in our model (in the assumptions for Expansionary Cash Flow as a percentage of Owners’ Cash Profits).

We have updated our revenue growth model to account for Oracle’s new segment presentation method. It looks as though Oracle’s Bring Your Own License (BYOL) strategy is starting to gain commercial traction and change the dynamics of the shift of Oracle’s On-Premise licenses to Cloud contracts. We have updated our model to allow for slightly faster revenue growth in the Explicit valuation period – from an average of 5% per year to 7% per year in the best case.

We have left all other operating assumptions the same as our March model, but have updated share count to reflect the lower number of shares outstanding as of June 15th.

Our valuation range has not changed considerably, and Oracle’s present stock price is sitting close to the middle of it. That said, we note that several of the lower values seem relatively unlikely, so we would look to increase our position size were the shares to fall to the low- to mid-$40 per share range.

We continue to believe that the most likely valuation outcome is toward the high end of our published range. Here is our updated model:

Framework Investing Integrated Valuation Model for Oracle 

The Waterfall is below.

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