Will a revenue boost keep Oracle’s share price afloat?

Oracle beat earnings expectations when it reported Q3 results last week and authorised $15bn in buybacks. Will the news allow the company’s share price to prosper during an economic downturn?

Cloud software company Oracle [ORCL] saw its share price surge by 20% Friday (13 March) the day after it reported strong earnings figures, including its best revenue growth in nearly two years. The company had hit a 52-week low of $39.80 on Thursday, prior to its report, as the coronavirus provoked a wider market selloff.

Despite volatile market conditions, the company has said that it does not expect much impact from the virus in near-term. It has also taken actions to ease share price investors’ anxiety by announcing $15bn in buybacks.

Given Oracle’s the confidence, can its share price prosper?

Earnings beat

Oracle reported better-than-expected results last week, with $9.8bn in revenues versus the $9.75bn expected by analysts and $0.97 per share compared to the £0.96 per share expected by the firm, according to CNBC. Revenue from Oracle’s biggest business segment, cloud services and license support meanwhile totalled $6.9bn, a 4% year-over-year increase.

Over the past six quarters the company has struggled to post year-over-year revenue gains of more than 0.5%, making the near 2% lift in sales significant for the company, MarketWatch notes. However, the company’s hardware and services divisions brought in $857m in revenue, down 6% in the quarter.

CEO Safra Catz said that the company expects “minimal impact” from coronavirus for the upcoming quarter (Q4). The executive said that this is because subscription revenue, which made up 61% of Oracle’s business, is unlikely to see near-term impact as much of it has already been contracted.

Alongside this the company — which already spent $13.9bn in stock buybacks through the first nine months of this fiscal year before the recent addition, MarketWatch reports —announced $15bn in stock buybacks, which will help to prop up its share price during this volatile period and also eases investor anxiety. “We think it's an incredible deal,” Catz said. “It's basically gone on clearance sale in the past few days, and we think it's an enormous — it's a fantastic investment.”

Despite this announcement however, Oracle saw its share price drop as much as 10% in pre-market trading on Monday.

Looking ahead

Despite the optimism, Catz offered wide guidance for Q4 in the face of the coronavirus spread. Projected revenue is expected at a range of a decline of 2% to a gain of 2%. This would represent total revenue for Q4 between $10.92bn and $11.36bn. Meanwhile, adjusted earnings are expected at $1.20 to $1.28 a share.

There are signs that the company is looking to cut its losses, after it announced earlier in the month (4 March) that it is looking to cut as many as 1,300 jobs across Europe, according to a report from the Irish Times. The lay-offs, expected in Dublin, Amsterdam and Malaga, come after the company fell short of revenue estimates in Q2 as its cloud services business failed to cover losses in its traditional licensing business. The impact of this is likely to emerge further in coming quarters.

Oracle share price vitals, Yahoo Finance, 16 March 2020

Analyst view

“In our view, Oracle’s execution capacity ranks among the best in the sector,” Societe Generale analyst Richard Nguyen recently wrote in a note to clients at the start of March, according to CNBC.

“In the past two recessions, the group successfully increased its margins thanks to its ability to cut costs rapidly,” he added, upgrading his rating on the share price to a buy from a hold.

“In the past two recessions, the group successfully increased its margins thanks to its ability to cut costs rapidly” - Societe Generale analyst Richard Nguyen

Elsewhere, Zacks rates the company as a hold while the consensus rating among 34 analysts polled by CNN is also to hold. Of these analysts 21 took this position, while seven rated it buy and two a sell.

The consensus median 12-month price target for Oracle was $50. Based on the share price’s closing price on 13 March, this would represent a modest 4.3% increase.