It was a big coup for Oracle (ORCL 0.73%) to become the cloud technology provider for ByteDance's TikTok back in late 2020. The social media app with ties to the Chinese government has become quite popular and it helps generate significant usage fees. TikTok being banned by government regulators from operating in the U.S. could be a big blow to Oracle's revenue stream.
Let's look at the impact of a TikTok ban on Oracle and whether investors should sell the stock based on a ban being enacted.
Is Oracle's warning a bit of precognition?
There are plenty of tales out there of famous warnings being made by oracles throughout ancient history. So when Oracle the company comes out with a warning, it behooves investors to take heed.
When the company published its latest annual report earlier this month, it added language to its risks section, citing legislation that President Joe Biden signed into law that has the potential to ban TikTok. As part of that law, it would be unlawful to provide internet hosting services to TikTok if China-based ByteDance doesn't take certain steps, including selling the social media site to a non-Chinese company within the next year.
Oracle said such a ban would negatively impact its revenue and profits if it is unable to provide service to the company and if it is unable to redeploy TikTok's capacity elsewhere before the deadline for action passes.
While the exact numbers are not disclosed, Wall Street analysts estimate TikTok is one of the largest customers of Oracle's $6.9 billion cloud infrastructure business. Evercore ISI analyst Kirk Materne estimates that TikTok could represent between $480 million to $800 million of the company's annual revenue. While that is a lot of revenue, it only represents between 1% to 1.5% of the $53 billion in revenue that Oracle generated in its last fiscal year (ended in May).
If TikTok does sell itself as required by the law, Oracle could be replaced as its cloud vendor, depending on what company buys the social media property. Companies such as Microsoft, Alphabet, and Amazon all have their own larger cloud service businesses and wouldn't need Oracle's services. The current owner, ByteDance, could also just refuse to sell the platform and not operate in the U.S.
Meta Platforms, the owner of Facebook and Instagram, meanwhile, uses multiple cloud service providers, so it might not be quick to move providers if it bought TikTok. Given that Oracle has a 12.5% stake in TikTok, it also might try to buy the platform itself.
One thing Oracle does have going for it is that cloud computing demand has been soaring due to the advent of artificial intelligence (AI). As such, this environment greatly increases the odds that the company would be able to redeploy its services elsewhere if it lost TikTok as a customer.
Image source: Getty Images.
Should investors sell Oracle stock?
Oracle's stock has had a strong 2024 and is up about 32% so far. That's despite only growing revenue by 6% this past fiscal year and 3% year over year last quarter. Most of that revenue growth, meanwhile, has been coming from its Cloud services business, with revenue up 25% for the year and 20% year over year in the quarter.
The recent increase in stock price has taken Oracle's valuation to a forward price-to-earnings (P/E) ratio of 22 times, which is around where the stock has traded historically for long stretches.
ORCL PE Ratio (Forward) data by YCharts
When looking at valuation, it is also worth mentioning that Oracle does carry a fair amount of debt, especially for a tech company. At the end of its fiscal year, the company had a net debt of $76.2 billion. However, it did generate $18.7 billion in operating cash flow and $11.8 billion in free cash flow this past fiscal year.
Given that TikTok is likely less than 1.5% of Oracle's revenue and that it would likely be able to redeploy its capacity, I would not sell the stock on the potential that it could lose the social media giant as a customer. There also remains a good possibility it will be able to maintain the business.
That said, given its current debt load, valuation, and overall revenue growth, I think the stock looks pretty fairly valued at the moment. That would put the stock more in the hold category for me.
