Oracle: Q4 Guidance Disappoints The Street, But Analysts Remain Bullish
Oracle (ORCL) reported earnings last week and this big-tech stock’s results inspired a bevy of interesting analyst notes. Prior to the earnings report, Oracle shares had performed quite well throughout 2021. In his pre-earnings roundup article at Nasdaq.com, Nobias 5-star rated analyst, Richard Saintvilus highlighted this performance saying, “Oracle shares have surged 37% over the past six months, more than doubling not only the 16% rise in the S&P 500 index, its performance has vastly outperformed the 14.7% rise in the Technology Select Sector SPDR ETF (XLK).” Saintvilus noted that as Oracle continues its cloud migration, “the database giant must demonstrate its cloud fundamentals can sustain its recent growth rate, especially given the fact that the stock is trading at a premium to its historical valuation.”
Continued growth in the cloud space as Oracle competes with existing leaders Salesforce (CRM) and Workday (WDAY) is the name of the game for Oracle and Saintvilus said, “for the stock to to keep rising, aside a top- and bottom-line beat Tuesday, Oracle guidance for 2021 must suggest it is ready to stake a legitimate claim to the cloud market.”
Unfortunately for Oracle shares, it appears that the stock did not live up to these expectations. ORCL was trading for nearly $83/share coming into its recent fiscal year 2021 fourth quarter report. Today, shares trade for $76.23, which means that they’ve dipped some 8% since posting the results. Bob Ferarri, a Nobias 4-star rated analyst, covered the Q4 report in a recent article, saying that Oracle’s highlights included:
Total quarterly revenues of $11.2 billion, up 8 percent year-over-year.
Cloud services and license support revenues of $7.4 billion, up 8 percent.
Cloud license and on-premise revenues of $2.1 billion, up 9 percent.
GAAP operating income of $4.5 billion and operating margin of 40 percent.
GAAP net income of $4 billion, up 29 percent.
Operating cash flow during the trailing 12 months reflecting a new record of $15.9 billion, up 21 percent.
Ferrari also noted that for the full-year, Oracle generated $40.5 billion in sales, which was up 4.5% on a year-over-year basis and represented a top-line record for the company.
ORCL’s bottom-line results may have been even more impressive for the year, with GAAP earnings-per-share coming in at $4.55 and non-GAAP earnings-per-share coming in at $4.67. These two EPS figures represent 48% and 21% year-over-year growth results, respectively.
So, with such strong growth in mind, why have Oracle shares fallen? In a word, poor guidance. Wajeeh Khan, a Nobias 4-star rated analyst who writes for invezz.com published a Q4 review last week and highlighted this guidance saying, “For the fiscal first quarter, CEO Safra Catz now forecasts up to 98 cents of adjusted EPS and a 3% to 5% growth in revenue. Analysts, on the other hand, are calling for $1.03 of adjusted per-share earnings on a 3% growth in revenue.”
As Saintvilus said, Oracle’s valuation has recently increased, with shares trading up to the 17x price-to-earnings multiple level, which is well above its 10-year historical average of approximately 14.6x. With this premium in mind, it appears that the market expected Oracle’s growth to exceed a low single digit rate, which is why Catz’s commentary was so disappointing. In his piece, Khan mentioned that Oracle “repurchased $20.9 billion worth of stock in fiscal 2021.”
This represents some very generous shareholder returns as the company’s bottom-line expands. However, he also quoted a J.P. Morgan analyst note that was posted after earnings which claimed that investors may not be able to rely on financial engineering to bolster the bottom-line moving forward.
The analyst note read: “A good chunk of the value-rotation uplift has now played out. Our checks do support the potential for Oracle to displace some very large competitor ERP footprints, and the $5 EPS threshold is drawing nearer as a favourable milestone, but with much less dry powder for exercising share buybacks, growing earnings will become a different challenge in the future because it must be driven relatively more by core operations.”
And, J.P. Morgan wasn’t the only major investment firm who had concerns after reading through Oracle’s Q4 report. Tony Owusu, a Nobias 4-star rated analyst published an article on CNBC.com last week highlighting a slew of other analyst notes which corresponded to Oracle’s quarterly report. Morgan Stanley maintained Oracle’s rating at even weight, and Owusu noted that “The firm says investors will need to see further evidence of accelerating growth before bidding the stock higher.” He said that Jefferies decided to maintain their “hold” rating on ORCL shares, raising their price target from $75/share to $80/share.
Owusu said that the Jefferies analysts believe that “The results were encouraging, but the investment firm doesn't see the stock being able to sustain its rally on low-single-digit growth.” Owusu highlighted Oppenheimer’s post-earnings report, which maintained the stock at a market-perform level. He explained that the Oppenheimer analysts are concerned about the capital spending that they believe to be required to maintain growth moving forward, quoting the investment firm which said that the shares "have priced in an acceleration of growth, but not necessarily the corresponding investments.” He said, “Analysts at Piper Sander maintained a neutral rating while raising their price target to $80 from $57.”
Owusu also noted that Citigroup also published an $80 price target on ORCL shares after the Q4 report. With shares currently hovering in the $76 area, it appears that these major analyst firms don’t see a lot of near-term upside left in the stock. However, Vladimir Dimitrov, a Nobias 5-star rated analyst who publishes work at Seeking Alpha recently wrote an article titled, “Oracle: The Turning Point Of The Business” which offered a much more bullish outlook.
Dimitrov said, “The cloud ERP space is where Oracle's business is exceptionally strong and far ahead of its other competitors, such as Workday (WDAY), SAP (SAP) and Microsoft (MSFT).” And, he continued, “Although the competition in the space has intensified in recent years, the gap between Oracle's Fusion ERP and other competitor offerings has not changed much since 2017.” Dimitrov provided two primary reasons as to why he believes that being a leader in the cloud ERP space creates strong competitive advances for Oracle, which is oftentimes overlooked in the cloud space. He said, “Firstly, the business is very sticky, with large multinational corporations rarely undergoing the risky process of migrating their ERP systems from one vendor to another.”
Looking at Oracle’s results, Dimitrov explains that Oracle boasts some of the highest EBIT margin in the cloud industry, saying, “Secondly, being an absolute leader in the space, while also combining the ERP service offerings with high quality database and secure cloud infrastructure places Oracle among the leaders in terms of profitability.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Historically, Oracle has traded with valuation premium that is far below its cloud peers and Dimitrov touches upon this saying, “A common misconception is that since Oracle is not among the leaders in the Infrastructure-as-a-Service (IaaS) space and lags behind the behemoths Amazon Web Services, Google Cloud and Microsoft Azure, then the business model of Oracle is weak.” However, he notes that the company’s high margins allow management to continue to invest in the Oracle Cloud Infrastructure platform to better compete with its peers. Dimitrov wrote, “ High and sustainable profitability on the other hand allows the management to reinvest significant amounts back into the business and not rely on constant M&A deals to inflate its topline.”
With this in mind, it appears that Dimitrov is not as concerned about capex as the Oppenheimer analysts. Dimitrov believes that this investment is necessary and has the potential to bear major fruit for the company, saying, “While certainly the past 10 years have not been spectacular for the sales growth of Oracle, it seems that things are about to change.”
When looking at the reports published by blue chip Nobias analysts (those with 4 and 5-star ratings by our algorithm) it appears that the majority of the opinions are in Dimitrov’s bullish camp. Since Oracle reported earnings on 6/15/2021, we’ve seen 19 published reports. 11 of them included “Buy” ratings. 7 of them included “Neutral” opinions. And just 1 included a “Sell” rating. 8 of these analysts have provided updated price targets. The average price target posted by Nobias blue chip rated analysts for Oracle shares in recent months is $78.50. This implies upside potential of approximately 3% relative to Oracle’s current share price of $76.23.
Disclosure: Nicholas Ward is long AMZN, CRM, GOOGL, and MSFT. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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