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Why is Oracle’s share price failing to impress investors?

Shares in software giant Oracle [ORCL] have fallen 8.6% from $60.18 in early July to $54.98 on Thursday 23 January as investors fret over less than stellar revenue numbers and uncertain growth hopes.

The group reported second-quarter figures just before Christmas to little fanfare as revenues grew 1% year-on-year in constant currency to $9.6bn – below consensus expectations of $9.65bn.

The company’s management conveyed optimism regarding its next set of results, due to be announced in March, saying double-digit earnings per share growth and revenue increases were expected. “It’s still early days, but the Oracle Autonomous Database already has thousands of customers running in our Gen2 Public Cloud,” Oracle co-founder and chief technology officer Larry Ellison said.

For the third quarter, Oracle expects revenue growth of 1-3% and EPS between $0.96 and $0.98, which would mark 10% growth on last year.

 

 

 

 

However, revenue growth is up just 1% to date compared with a full year 2019 revenue climb of 3%, according to Seeking Alpha. Insights firm Trefis also estimates only a 1% growth in top-line numbers to reach $39.9bn and $41bn in 2020 and 2021, respectively.

Oracle’s EPS hopes are perhaps a little more achievable, due to better margins and through buying back $10bn of stock so far this year.

 

Revenue growth: show, don’t tell

Investors, downbeat on revenue growth compared to rival software firms, are unimpressed by its current market valuation of $175bn, Seeking Alpha noted. However, this “appears to have hit a floor as the company has a history of generating strong cashflow, something investors are fond of”.

Indeed, there was free cash flow conversion of 112% in the second quarter.

“Valuation remains well below other legacy technology companies because of their lacklustre growth. There still appears to be a show-me story rather than investors immediately accepting the word of management,” Seeking Alpha stated.

“With the company's guidance seeming to be more of a challenge than a sure thing, investors should be cautious with this name as there are better opportunities within the technology market,” the publication added.

“With the company's guidance seeming to be more of a challenge than a sure thing, investors should be cautious with this name as there are better opportunities within the technology market” - Seeking Alpha

 

There is hope however for the business in its cloud services and licence support revenue which grew 4% during the second quarter.

According to Zacks Oracle is “witnessing strong growth in Cloud HCM, which is increasingly being purchased as a part of an ERP cloud application suite. Also, the migration of several midsized SAP customers to Fusion ERP is an upside”.

Its autonomous database is also “gaining traction”. In the second quarter, it added around 2,000 new customers.

“Oracle is undertaking every effort to enhance functionalities of cloud-based applications, which is encouraging adoption. These initiatives are expected to provide the company an edge in the Database-as-a-Service market and reinforce its competitive position against Amazon Web Services,” Zacks added.

“Oracle is undertaking every effort to enhance functionalities of cloud-based applications, which is encouraging adoption. These initiatives are expected to provide the company an edge in the Database-as-a-Service market and reinforce its competitive position against Amazon Web Services” - Zacks

 

Oracle’s silver lining

Indeed as its cloud services and licence support segment represents 70% of total revenue and with an expected unchaining of corporate spending straightjackets this year, revenues could experience a further lift in the months ahead. Trefis said this segment could contribute $27.1bn to Oracle’s full-year revenues.

Hardware sales are suffering, down from $4.2bn in revenues in 2017 to $3.7bn in 2019. They are likely to fall further this year to $3.5bn.

The main drags on performance, however, are its cloud license and on-premise license revenue, which saw a 7% second-quarter dip, as businesses move away from these models. Revenues in this area have dropped from $6.4bn in 2017 to $5.9bn in 2019, according to Trefis. But even here there is hope, as Trefis estimates that revenue land between $6bn and $6.2bn in 2020 and 2021, respectively.

 

Market Cap$168.738bn
PE ratio (TTM)16.68
EPS (TTM)3.15
Operating Margin (TTM)35.48%

Oracle share price vitals, Yahoo Finance, 30 January 2020

 

Oracle share price: what the analysts say

According to Market Screener, the mean consensus on the Oracle stock is hold, with an average target price of $56.24, which would represent a 2.3% increase on 23 January’s price.

Analysts appear to be waiting for Oracle’s revenues to live up with management’s promises and start gathering pace to ward off competition from legacy and more agile rivals. Further developing its cloud services and innovating will be key.

There may be also more headroom for Oracle to hike up its dividends to attract investor interest.

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