Oracle (NASDAQ: ORCL) is an interesting story for more reasons than 1 and 1 of those reasons is its position within the reporting cycle. This blue-chip, legacy tech company shifting to cloud services reports almost precisely between the cycle's peaks, making it a bellwether for the sector and the economy. The takeaway from the Q3 results is that growth is slowing, and the outlook is dimming, weighing on the market.
However, this is an opportunity for investors to load up on shares, so don’t misunderstand me. The outlook dims, but Oracle still produces growth and has other attractive qualities. Trading at 18X its earnings, it is reasonably valued for a growing tech company with oodles of cash flow and a healthy dividend.
Oracle is no high-yielding stock, but it is a dividend growth stock that just upped the payment by 25%. This puts the payout near 1.9% with the post-release drop in share prices, and additional increases can be expected. The company has already increased the payment for 9 consecutive years and only pays about 32% of its earnings.
Some analysts have come out to support the stock since the increase and results but take this news with a grain of salt. The four reports that have shown up on Marketbeat.com’s analyst tracking page include three target increases and 1 set target. The set target is promising; it is $105 compared to the consensus of $94, but the three increases are all below the consensus. This activity should help support the price action but may not provide the juice to get a robust rebound in play.
Oracle’s Robust Results Underwhelm The Market
Oracle had a good quarter producing growth in both its main operating segments. Still, revenue fell short of the consensus, and nothing in the report suggests an acceleration of business this year. The $12.4 billion in revenue is up 18% compared to last year but missed the consensus by $20 million, a slim margin, but this is not the only tepid detail. On a segment basis, Cloud License and On-premise License revenue was flat YOY, while Cloud Services and Support were up 17%.
Within this, the cloud-only portion of the business is up 45% but offset by weakness in the legacy business. In addition, the addition of Cerner is worth 13.7% of the growth, which leaves organic growth closer to 4%. Within the cloud-only business, IaaS grew by 55%, SaaS by 42%, and ERP and Netsuite Cloud by 25% and 23%. The takeaway is that Oracle may need to separate its cloud and legacy businesses to unlock the value in the cloud business.
The margin news is just as tepid as the revenue. The company logged declines in gross and operating margins that left the GAAP earnings down on a YOY basis, but there is growth on an adjusted basis. The adjusted EPS came in at $1.22, up $0.09 from last year, and lagged growth on the top line despite beating the consensus by $0.02.
The Technical Outlook: Oracle Plunges, Buying Opportunity At Hand
Shares of Oracle plunged 5% in premarket trading, and they may move lower, although support may also be near. The stock is above the 150-day moving average, which may provide or trigger support when broken. This level is consistent with a break out so it could produce a strong bounce and even a rebound. If not, the following targets are near $80 and then $70 which should be the absolute bottom if the market gets this far. Investors should be patient and wait for the market to signal a bottom until then.
