3 Reasons ORCL is Risky and 1 Stock to Buy Instead

Oracle currently trades at $149.10 per share and has shown little upside over the past six months, posting a small loss of 3.4%. The stock also fell short of the S&P 500's 18% gain during that period.

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We don't have much confidence in Oracle. Here are three reasons why ORCL doesn't excite us, plus one stock we'd rather own.

A company's long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Oracle grew its sales at a 11.9% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Oracle's demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 40%, meaning it lit $40.01 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments (i.e., stocking inventory, building new facilities) are the primary culprit.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Oracle burned through $28.72 billion of cash over the last year, and its $155.9 billion of debt exceeds the $37.08 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Oracle's fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Oracle until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.