Oracle (ORCL) stock has not enjoyed the sort of momentum we have witnessed in other software stocks which have skyrocketed amid excitement over AI. Over the past six months, Oracle has suffered a 10% decline in the share price, while the S&P 500 index has risen almost 16%.
However, the shares are up 6% year to date, modestly trailing the 8% rise in the S&P 500 index. The database and cloud giant will report second quarter fiscal 2024 earnings results after the closing bell Monday. Investors are eager to see whether the stock’s underperformance is temporary or a sign of things to come. But according to investment form Barclays, Oracle's third-quarter expectations are achievable. And I think this could be a buying opportunity for the investors to add to current positions.
"Q3 is a relatively small quarter for Oracle and we do not think there is much room for meaningful outperformance in the major segments," said the brokerage firm. In that vein, the company’s quarterly earnings have shown not only meaningful revenue line growth, there’s also been a noticeable improvement in the Cloud business. The management’s strategy to shift of Oracle's products - such as Fusion, NetSuite and OCI - into the cloud has helped filed growth in the past several quarters.
The management has also produced strong cash flow and operating leverage which investors value. On the all-important AI front, the company has forged strategic partnerships with two of the prominent leaders in the industry in Microsoft (MSFT) and Nvidia (NVDA). The partnerships underscore the Oracle’s competitive commitment for AI. All of that said, for the stock to keep rising on Monday, the company will need to deliver a top and bottom line beat, along with strong guidance.
In the three months that ended February, Wall Street expects Oracle to earn $1.38 per share on revenue of $13.31 billion. This compares to the year-ago quarter when earnings came to $1.22 per share on revenue of $12.40 billion. For the full year, ending May, earnings are projected to rise 8.4% year over year to $5.55 per share, while full-year revenue of $53.7 billion would rise 7.5% year over year.
Over the last three months, the company has significant changes to its estimates. Earnings per share estimates have been revised upward six times. Part of the reason has been string of M&A, most-recently the acquisition of Cerner, has also been a major source of revenue growth. With that growth rate having been recently surpassed, Oracle will need to focus on organic revenue. In that regard, Oracle’s strong execution, which includes six revenue beats over the last ten quarters, has exceeded the stock’s performance.
The beats have been driven by a combination of factors, namely the cloud infrastructure and the autonomous database segment revenue, which includes both the Infrastructure as a Service business and the Software as a Service business. These segments have gown at a strong pace. The management’s transition from licensing Oracle products to a subscription model has created predictable and stable revenue growth. And this growth rate is expected to remain in the just-ended quarter. In the second quarter, the cloud business grew 25% year over year.
In the second quarter, Oracle reported adjusted EPS of $1.34 which beat by a penny, while Q2 revenue of $12.94 billion surpassed estimates by $110 million. Q2 cloud revenue came to $4.8 billion, while Q2 cloud infrastructure revenue of $1.6 billion, surged 52% year over year. Just as impressive, Q2 total Remaining Performance Obligations climbed to over $65 billion, topping annual revenue, underscoring a strong measure of cloud demand.
With the stock’s seemingly unjustified underperformance, Oracle on Monday can regain its momentum if it can continue to demonstrate its cloud leadership potential.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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