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Oracle’s Rally Takes a Short Pause. There’s Still More to Come.

Shares of Oracle have rallied impressively since Barron’s wrote a bullish cover story about the company in February.

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Oracle shares have had a fantastic run in 2021. The stock is up 58% since Barron’s highlighted the enterprise software company’s impressive cloud progress in a February cover story.

Oracle (ticker: ORCL) has seen increased adoption of cloud-based versions of its database and application software, while showing strong growth for Oracle Cloud, an emerging rival to Amazon Web Services and Microsoft Azure.

But there’s a new wrinkle in the Oracle story. Late Thursday, The Wall Street Journal reported that Oracle is holding talks for a $30 billion acquisition of electronic medical records company Cerner (CERN).

Oracle shares slumped 6.4% on the news to $96.62, with investors likely concerned about how Oracle would finance the deal and how it would affect the company’s cloud push and stock buybacks.

It’s likely to be just a brief interruption for Oracle’s rally. The cloud growth is a multiyear opportunity.

Until the Cerner news, Oracle stock was basking in earnings glory. Earlier this month, Oracle said revenue for its fiscal second-quarter ended Nov. 30 was up 6% from the figure a year ago, well ahead of the company’s guidance.

Oracle CEO Safra Catz noted that combined cloud-based applications and database software revenue had risen 22% in the period, with growth likely accelerating in coming quarters. The stock rallied 15% on the news, to a record close.

Oracle has continued to support its stock with an aggressive repurchase program. The company bought back $7 billion worth in the latest quarter alone and has repurchased close to half of its shares over the past decade. The buybacks could be derailed by a deal for Cerner.

It’s worth noting that Oracle has been thinking about buying Cerner for a long time. Cerner’s name was on an internal list of nine potential Oracle M&A targets that surfaced in 2004. (Every other company on that list has now been acquired by Oracle, SAP , or someone else.)

Neither Oracle nor Cerner responded to requests for comment, but Oracle founder and Chairman Larry Ellison talked up the company’s interest in healthcare on the recent earnings call.

A Cerner acquisition would be the largest in Oracle’s long history of deal-making, which includes $9.3 billion for NetSuite in 2016, $7.4 billion for Sun Microsystems in 2010, $8.5 billion for BEA Systems in 2008, $5.9 billion for Siebel Systems in 2006, and $10.3 billion for PeopleSoft in 2005.

At $30 billion, Cerner would be priced at about five times Wall Street’s 2022 sales estimate of $6.1 billion. Stifel analyst Brad Reback points out in a research note that Cerner has a gross margin in the low 80% range, but operating margins of just 20%, “leaving a significant amount of operational efficiency to capture.”

It’s yet another opportunity for Larry Ellison and Safra Catz.

Write to Eric J. Savitz at [email protected]

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