Oracle Stock Down 5% On Post-Earnings Weakness

Oracle, The New Bellwether For Stocks

Oracle (NYSE:ORCL) has an interesting position in the world of stocks and not just because it is a blue-chip old-tech name reinvigorating growth via the cloud. Oracle is one of those unusual companies that choose to end its year and report its earnings out of synch with the broader market and its peers. What that means for us is that Oracle’s fiscal Q3 report falls almost exactly between the peaks of reporting seasons making it a very good benchmark for between-season activity. The bottom line, Oracle’s earnings report and the outlook is one everyone should pay attention to even if they don’t own or have interest in the stock.

Oracle Falls On Outsized Expectations

Oracle had a good quarter and is poised for long-term growth and yet shares of the stock are down more than 5.0% following the release. The company’s revenue of $10.09 billion is up 3.0% from last year but evidence of a growing problem in the market. The growth, while good, was largely priced in, Oracle only beat the consensus by 20 basis points and that is not very much at all. The good news is that much of the strength is in the cloud and specifically in the company’s newer product-lines so growth should accelerate as these segments mature. Cloud services and support, by far the largest segment of the business, grew 5% while licensing and services grew 4%.

"We continued to extend our huge lead in the cloud ERP market as Fusion ERP grew 30% and NetSuite ERP grew 24% in Q3," says CEO Safra Catz. "Oracle's rapidly growing highly-profitable, multi-billion dollar cloud ERP businesses helped drive subscription revenue up 5% and operating income up 10% in the quarter.  Subscription revenue now accounts for 72% of Oracle's total revenues, and this highly-predictable recurring revenue-stream along with expense discipline are enabling double-digit increases in non-GAAP earnings per share."

Moving down the report the company’s revenue gains and expense discipline are seen in the bottom-line results. Operating income increased by 10% with margins rising to 47% YOY. The adjusted $1.16 beat by a solid nickel while the GAAP EPS of $1.68 beat by $0.82. On a trailing TTM basis, the company’s operating FCF increased to $14.7 billion and is being put to good use.

Oracle Gives Cash Back To Shareholders

Oracle may have shocked the market (and not in a good way) when it announced its dividend increase and buyback plans. While generous, the 33% increase in the dividend was nothing more than the company’s distribution history was indicating and could have been more substantial. As for the buyback plans, it too was expected although the $20 billion is another very generous figure. At current share prices, the new authorization is worth about 10% of shares outstanding and 15% of the float which is more than enough to keep share prices from falling below trend. In our view, the takeaway here is that Oracles balance sheet is in good shape, FCF is plentiful, there is growth in the outlook, and the 1.85% yield is as safe as a dividend can be.

The Technical Outlook: Oracle Falls Back To Trend

Shares of Oracle are down hard in the premarket session but so far the trend is in no danger of breaking. What we have here is a case of a market that got well ahead of itself and is now returning to its trend. The next target for support is still well above the ultra-long-term and long-term trend lines and would signal an uptick in outlook if confirmed. A move below $66.26 would be bearish but still has plenty of room to fall before putting the trend in danger. A decline to $61 or even $55 would not alter the long-term bullish outlook for the company and would ultimately lead to a buying opportunity. Assuming that $66.25 is confirmed as support, we expect to see Oracle trade at new all-time highs before the end of the year.