Oracle Shares Slump in After-Hours Trading as Cloud Revenue Misses Estimates

Oracle Corporation, the world’s largest database management company, reported a better-than-expected profit in the fiscal third quarter but missed analysts’ estimates for revenue from cloud services and licenses, sending its shares down over 5% in extended trading on Wednesday.

Austin, Texas-based computer technology corporation said its total quarterly revenues were up 3% year-over-year to $10.1 billion, slightly above the Wall Street consensus estimates of $10.07 billion. Non-GAAP net income was up 10% to $3.5 billion, and non-GAAP earnings per share was up 20% to $1.16 per share, beating analysts’ forecasts of $1.11 per share.

However, cloud services and license support revenues were up 5% to $7.25 billion, slightly missing the market expectations of $7.27 billion.

That pushed Oracle shares, which surged more than 20% in 2020, down over 5% to $68.3 in extended trading on Wednesday.

“Shares are down 7% upon results to $67 per share, which we believe is a correction for unfounded exuberance this past year. Despite the market’s reaction, fourth-quarter guidance was better than we expected, which has led us to improve top-line assumptions over the next five years. As a result, we are raising our fair value estimate to $58 per share from $53 per share for narrow-moat Oracle,” said Julie Bhusal Sharma, equity analyst at Morningstar.

Oracle increased the authorization for share repurchases by $20 billion. Oracle also announced that its Board of Directors declared a quarterly cash dividend of $0.32 per share of outstanding common stock, reflecting a 33% increase over the current quarterly dividend of $0.24.

Oracle Stock Price Forecast

Fourteen analysts who offered stock ratings for Oracle in the last three months forecast the average price in 12 months of $72.00 with a high forecast of $82.00 and a low forecast of $57.00.

The average price target represents a -0.17% decrease from the last price of $72.12. Of those 14 analysts, six rated “Buy”, seven rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $73 with a high of $90 under a bull scenario and $48 under the worst-case scenario. The firm gave an “Equal-weight” rating on the computer technology corporation’s stock.

“Strong cloud momentum in back-office applications and database tech still falls short of driving a meaningful acceleration in total revenues. While a low multiple, share repurchases, and a dividend increase keep the value story intact, investors looking for a rebound story are likely disappointed,” said Keith Weiss, equity analyst at Morgan Stanley.

Several other analysts have also updated their stock outlook. Oracle had its price target boosted by stock analysts at Cowen to $77 from $70. The firm presently has an “outperform” rating on the enterprise software provider’s stock. Cowen’s price objective would suggest a potential upside of 7.95% from the company’s previous close. Barclays raised shares to an “overweight” rating from an “equal weight” and lifted their price objective to $80 from $66.

Moreover, Bank of America issued a “neutral” rating and a $68 price objective. Citigroup issued a “neutral” rating and a $65 price objective for the company. Credit Suisse Group raised their target price to $75 from $67 and gave the stock an “outperform” rating.

Analyst Comments

Oracle’s current low valuation at 14x CY22e EPS reflects its slower growth rate compared to peers. Despite potential opportunities within existing database customers and cloud-based ERP applications, offsets from waning businesses mean 2021 likely lacks the catalysts for the positive inflection in revenue growth investors would need to see to drive multiples higher,” Morgan Stanley’s Weiss added.

“We see 16% EPS growth in FY21 and 6% in FY22, driven by an aggressive pace of share buybacks. However, cc revenue growth is 2%, in a software sector filled with strong secular growth stories, and just 2% operating income growth points to Oracle potentially reaching peak margins, leaving us ‘Equal-weight’ at our $73 price target.”

Upside and Downside Risks

Risks to Upside: Stronger adoption of Autonomous Database offering drives positive YoY growth in License revenues. Accelerated adoption of Fusion Apps -highlighted by Morgan Stanley.

Risks to Downside: Disruptive technologies in the data management market. Rapid migration towards the SaaS-based subscription application model hurts near-term optics due to ratable revenue recognition. Strong competition from other secular Cloud application vendors.

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