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Oracle’s share price sinks after near-miss on revenue results; what’s next?

Oracle’s share price plummeted after the company posted disappointing second-quarter revenues. After a turbulent few months for the software stock and the wider sector, where will it go next?

Oracle Corporation’s [ORCL] latest set of earnings have failed to impress investors. On Thursday 12 December, it revealed that total revenues for the second quarter rose by 1% year-on-year to $9.6bn, with GAAP operating income climbing 3% to $3.2bn. Such slim figures suggest that it will be difficult for the company to achieve its full-year targets.

The news sent the software giant’s share price plummeting by 3.2%, from $56.31 at market close on December 11 to end the week at $54.51.

 

 

 

What went wrong?

While Oracle’s earnings per share of $0.90 was ahead of $0.89 per share analysts had forecast, the company failed to deliver on revenue expectations of $9.65bn.

The overall report contained a number of similar near-misses. Revenue from its largest business segment, Cloud Services and License Support, came in at $6.8bn, up 3% year-on-year, but slightly below the $6.82bn consensus estimate among analysts surveyed by FactSet.

Meanwhile, the Cloud License and On-Premise License business segment posted $1.13bn revenues, down 7% year-on-year and below FactSet’s consensus estimate of $1.17bn.

There was also some unease when Oracle co-founder and CTO Larry Ellison said the business had “no plans for having a second CEO” following the recent death of co-CEO Mark Hurd.

Oracle’s now sole CEO Safra Catz said she expects to report $0.95 to $0.97 EPS in its next quarter and to achieve double-digit earnings growth for the full 2020 fiscal year.

 

Market cap$179bn
PE ratio (TTM)17.28
EPS (TTM)3.15
Operating Margin (TTM)35.48%

Oracle share price vitals, Yahoo Finance, 16 December 2019

 

Analysts remain unconvinced

"After weaker first quarter results the company needs to pick up the pace for the remainder of the year," Wedbush analysts Steve Koenig and Ahmad Khalil said in a note to clients, adding that they are particularly looking for signs of improvement in its core database business.

“While management commentary about the increased use of Oracle’s new autonomous database product is encouraging, weak total license sales shows that clients are taking time to spend more on other new products,” added Bloomberg Intelligence analyst Anurag Rana.

“While management commentary about the increased use of Oracle’s new autonomous database product is encouraging, weak total license sales shows that clients are taking time to spend more on other new products” - Bloomberg Intelligence analyst Anurag Rana

 

She believes the weakening global economy has contributed to this uncertainty and doesn’t expect the trend to change in the near-term. Economic worries could also “hurt cloud applications sales”.

 

Storm clouds ahead

This unease over the strength and breadth of cloud offerings and whether nervous or cash-strapped businesses are continuing to spend isn’t just confined to Oracle.

“I believe Software as a Service stocks are getting hit because of the softness in enterprise spend,” said Patrick Moorhead, principal analyst at Moor Insights & Strategy, adding that geopolitical and economic uncertainty is causing cautious spending.

Cloud software ETFs such as the iShares Expanded Tech-Software Sector has fallen in recent weeks, as has First Trust Cloud Computing. Meanwhile, enterprise software company Workday’s [WDAY] shares have dropped from $218 in July to $159.46 at close on 13 December. It reported that growth is slowing for its Human Capital Management (HCM) software, a core product.

“It will exit the year with 20% growth in its core HCM product, which has slowed due to the law of large numbers and higher penetration,” Jefferies analyst Brent Thill said when the announcement was made in October, saying the company will now need support from growth in its financial services product.

“Looking at the big picture, our concern is that the company doesn’t have an obvious third act for driving growth after HCM and Financials,” added Wedbush analyst Steve Koenig.

“Looking at the big picture, our concern is that the company doesn’t have an obvious third act for driving growth after HCM and Financials” - Wedbush analyst Steve Koenig

 

Not all bad news

However, this sector pull-back may not offer immediate opportunities for traders and investors. According to Morgan Stanley analysts the sector’s troubles have not caused enough of a slump to “dive deep into the sector”. It still sees “unfavourable risks/rewards for a lot of the high-fliers in software”.

A calming in trade tensions between the US and China and a potential Brexit resolution could ease some of the global economic worries holding businesses back.

Although Oracle delivered its fair share of disappointing news to investors, its results did also highlight the ‘strong’ performance of its Fusion ERP Cloud product. Revenues were up 37% and NetSuite ERP revenues up 29%.

Ellison also praised the Oracle Autonomous Database and the “thousands of customers” running its Gen2 Public Cloud. “We expect that growth rate to increase dramatically as we release Autonomous Database running on our Gen2 Cloud@Customer into our huge on-premise installed base over the next several months,” he said.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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