This article was written exclusively for Investing.com

Over the past decade, including dividends, Oracle (NYSE:) stock has returned 182%. That’s nearly 11% annualized, a seemingly impressive number.

But in context, buying and holding Oracle stock actually wasn’t such a big trade. The Invesco QQQ Trust (NASDAQ:), an exchange-traded fund that tracks the index, returned just over double. Large-cap software stocks did even better. Salesforce.com (NYSE:) narrowly topped this index, while Microsoft (NASDAQ:) returned almost 900% and Adobe (NASDAQ:) an incredible 997%.

Of course, the last decade included a roaring bull market, at least until the last two months. The next decade may not see such a rising tide. Inflation, political challenges and the growing risk of a global recession all suggest that equity returns will be lower going forward than they have been in retrospect.

In other words, expectations must be lowered and risks must be managed. In this very different environment, it may be time for Oracle stock to outperform rather than lag.

The case of ORCL shares

The main problem with Oracle’s bull case is that it might be too easy. Stocks have only sold 36% since December, and at this point the fundamentals look exceptionally attractive. Adjusted earnings per share for (end-May) was $4.90, giving the stock a price-to-earnings multiple of less than 14x. Yet Oracle continues to grow earnings: Adjusted EPS increased 5% in FY22 and 8% excluding currency effects.

The company does not seem to have finished its growth either. Fourth quarter results were , beating both Oracle’s forecast for the quarter and analysts’ expectations. Oracle’s outlook for the coming fiscal year was also optimistic.

What is driving the recent growth is the long-awaited success of cloud computing. For a long time, the bulls hoped that Oracle might be a newer, albeit smaller, version of Microsoft. It’s easy to forget, but for the past decade, Microsoft seemed like a company whose growth was over. Between early 2010 and early 2013, Microsoft stock fell 12%. The QQQ rebounded 42%.

The reason Microsoft stock has stalled is that Microsoft has gone nowhere. But Microsoft’s cloud strategy ultimately paid off, and as noted, ten-year investors have nearly increased their investment tenfold.

Oracle doesn’t have Microsoft’s reach, but it’s aiming for the same kind of cloud transition. It’s seeing success. According to the fourth quarter conference call, Oracle’s cloud business grew revenue by 22% in fiscal 2022, and the company expects a growth rate of more than 30% in the year. 23. This includes ERP (Enterprise Resource Planning) software running on the cloud, as well as the cloud infrastructure business that competes with Amazon (NASDAQ:), Microsoft and many others.

Oracle sees room for more growth. Cerner’s recent closure bolsters an already impressive position in healthcare, literally the world’s largest industry. Oracle President and Chief Technology Officer Larry Ellison talked to create a national health records database, an effort that would benefit both the company and Oracle. Ellison said after the fourth quarter that such a project “clearly [is] is going to be our biggest business.

These types of opportunities are generally not available to companies valued at 14 times earnings. This type of multiple is reserved for mature and low-growth companies. Indeed, another large-cap software company is trading at 14x fiscal 2022 earnings: IBM (NYSE:), a company that has long disappointed investors and has seen its stock drop 29% over the past last ten years.

Why are Oracle shares so cheap?

Again, the bull’s case seems easy, even a little too easy. Certainly, there are reasons why the current rating assigned to ORCL makes sense.

The first is that despite all the optimism about the cloud business, Oracle as a whole isn’t growing so quickly. Total revenue increased only 7% in FY22, even at constant currencies.

The problem for Oracle is that cloud revenues don’t add up. Much of the company’s reported growth in cloud business growth has simply come from existing customers moving away from so-called on-premises applications (in which software runs on local hardware rather than a cloud external or hybrid).

Certainly, Oracle is also winning new business in the cloud. And obviously, it’s good news that Oracle is successful in the cloud, because if it isn’t, its total revenue will go down. Existing on-premises customers will migrate to more advanced and flexible cloud offerings from other vendors. Still, cloud growth of more than 30% next year doesn’t mean Oracle as a whole is growing that fast.

Meanwhile, even with cloud growth, Oracle’s earnings aren’t as impressive as the EPS numbers suggest. Oracle repurchased a substantial amount of stock last year; its FY22 diluted weighted average number of shares was nearly 8% lower than the prior year’s figure.

These buybacks accounted for all of the company’s Adjusted EPS growth. Adjusted net profit, even excluding currency, was down 1% year-on-year.

Adding to the concern here, Oracle excludes stock-based compensation from adjusted earnings figures – and stock-based compensation is important. The FY22 figure was over $2.6 billion, or over 6% of revenue. This dilution is a real expense: it does not directly cost Oracle money, but it absorbs some of the money used for stock buybacks.

Add in the stock-based mix and FY22 EPS drops from $4.90 to around $4.08 (based on the company’s effective tax rate). The final P/E in turn goes from 13.8x to 16.6x.

Paying nearly 17 times earnings for a company that didn’t grow adjusted earnings at all last year suddenly seems like a much less attractive proposition than the adjusted EPS-based argument of paying 14 times for a 8% growth.

Take the long term

All in all, the case for ORCL shares is not as straightforward as it first appears. But that doesn’t mean the deal isn’t attractive at all.

Indeed, at $67 and 17 times earnings (again, adding equity back in), stocks look intriguing. Cloud growth is not purely additive, but it is substantial. Oracle expects profit margins to improve going forward as well, which should accelerate earnings growth over time.

And at 17 times earnings, Oracle doesn’t need to grow that much for the stock to do reasonably well. The sharp drop from $100+ in December marks a drastic change in valuation. Oracle is expected to increase its earnings at a certain rate in the future. If growth is modest, the stock is likely doing well, and investors are receiving a dividend (which Oracle just raised 19%) that yields nearly 2%, along with a steady increase in ownership through buyouts continuous actions.

If Ellison is right, however, and Oracle becomes a global force in healthcare, 17x is going to be ridiculously cheap. ORCL probably won’t mimic MSFT’s 900% returns, but it’s possible the stock could double or triple within a few years as revenue growth accelerates and margins improve.

The downside risk is simply Oracle shutting down, being the next IBM, not the next Microsoft. But the strength of recent quarters (ORCL stock also rose after December’s second quarter report) suggests that is unlikely to happen.

In a market like 2015, where there were opportunities to take risks and chase triple-digit returns, this type of case might not stand out. In the 2022 market, where downside risk is seemingly everywhere, Oracle’s stock profile looks much more impressive on a relative basis.

Investors can expect to earn decent returns by owning ORCL at $67 while retaining the potential for a big upside should the company’s big plans materialize. In this type of market, that’s about all investors can reasonably ask for.

Disclaimer: As of this writing, Vince Martin has no position on any of the stocks mentioned.

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