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Is Oracle A Good Investment After Its Cerner Acquisition?

Oracle’s acquisition of Cerner will see the company move into the lucrative medical technology space in a deal valued at over $28 billion.

Cloud healthcare was worth more than $28 billion in 2020 and is expected to grow at an 18% compound annual growth rate (CAGR) to reach $65 billion by 2026. It marks a significant move for Oracle, by expanding its footprint in an industry that is ripe for disruption. 

What does Oracle do?

Oracle (NYSE: ORCL) is a cloud services provider that sells both software and hardware applications for businesses to manage their infrastructure. The company serves dozens of different industries for enterprise resource planning (ERP), supply chain and manufacturing (SCF) management, and customer relationship management (CRM). 

What does Cerner do?

Cerner (NASDAQ: CERN) is a medical technology specialist using data-driven insights to solve complex issues in clinical, financial, and operational functions for the healthcare sector. Cerner serves some of the largest clients in the U.S., including Kaiser Permanente, Nuvance Health, and McLaren Health Care Corporation.

What does the deal mean for investors?

The Bull Case

It’s certainly not the most exciting opportunity when compared to the high-growth tech plays out there, but the deal does represent some synergies for both companies. Oracle, offering products for virtually every industry out there, and Cerner’s specialized suite of healthcare-focused services does line up well for Oracle to scoop up a greater market share. It eliminates any competitive concerns and both companies can use shared industry experience to expand their footprint going forward.

The Bear Case

Cloud services margins are typically below that of other software companies, but the pair don’t exactly have explosive growth. Both only show single-digit revenue growth in the last year — at a time where the digitalization of commerce as we know it — would be expected to have a much greater impact.

$28 billion is a hefty price tag for any company, so it’s important to make it the right acquisition. Cerner is being negatively impacted by the ongoing COVID-19 pandemic with margins taking a hit — almost in half —year-over-year (YoY) in its most recent quarter, so paying a 20% premium from where the company was trading just a few days ago is hardly a steal. 

Conclusion

It’s definitely an industry that investors should keep an eye on as an 18% CAGR is no joke. If you’re seeking out a steady company with reliable income streams and a decent dividend, this might be one that warrants further exploration. With that being said though, it’s a highly competitive space and acquisitions are always tricky to maneuver, so I’d be looking elsewhere before snagging this one.

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