Oracle (NASDAQ: ORCL) is an important company to watch for more reasons than one. In regard to the earnings cycle, it reports mid-way between peaks marking the low point of the cycle. In regard to its business, the company can give deep insight into the SaaS and now Cloud Computing industries, and this quarter is no exception. The fiscal Q1/calendar Q3 report reveals two things about the market that investors need to know. The first is that demand for cloud computing is still strong at the infrastructure and SaaS levels which is good news for companies from Microsoft (NASDAQ: MSFT) to Amazon (NASDAQ: AMZN) and Zscaler (NASDAQ: ZS) to Salesforce (NASDAQ: CRM). The second is that FX headwinds are strong. The dollar index is trending strongly higher and up 22% over the last 18 months alone and that is digging into offshore and bottom-line profits.
Oracle Had A Great Quarter Despite Headwinds
Oracle had a great quarter despite the headwinds and the results can only be called weak when compared to the analyst's expectations. The company brought in $11.45 billion in net revenue which is up 17.7% including the acquisition of Cerner. On an organic basis, the company’s revenue is up 8% with strength in the cloud leading the way. The company’s cloud revenue grew 45% YOY to $3.6 billion and is now 30% of the net. On an FX-neutral basis, however, topline growth would have been 430 bps higher with corresponding strength in all segments. Looking deeper into the cloud numbers, Cloud Infrastructure grew by 53% and was offset by a smaller 43% gain in Cloud Applications. Within the applications segment, Fusion ERP grew 33% and Netsuite by 27%.
"This is the first quarter we owned Cerner and they just delivered the best revenue quarter in their history. We expect Cerner to do even better in the coming quarters as we develop an all-new suite of healthcare cloud services," said Oracle CEO, Safra Catz
Moving down to the earnings there is some bad news in that margins contracted and slightly more than expected. The good news is that margin contraction did not fully offset the revenue strength so there is some YOY growth just $0.04 less than expected at $1.03. The mitigating factor is FX which impacted results more than feared and shaved $0.08 off the GAAP and adjusted results.
The Analysts Weren’t Overwhelmed By Oracle’s Results
The analysts weren’t overwhelmed by Oracle’s message for the market but the chatter has so far been favorable. The four commentaries out so far include three price target increases that have the consensus figure edging higher in the 30 and 90-day periods which isn’t all that bullish. The sentiment is only a Hold, as well, which doesn’t offer much support unless the results start to attract some upgrades. The consensus price target of $89.90 is about 17% above the pre-release close so there is some upside available although general market conditions may keep the stock from moving much higher.
The Technical Outlook: Oracle Bottomed But …
Oracle bottomed over the past few quarters but it may not have made a full reversal. It looks like the stock is range bound between $66 and $80 and possibly heading lower in the near to short-term. Longer-term, the company’s growing cloud business should support higher stock prices and there is the dividend as well. The company is paying a dividend worth about 1.7% in yield and there is an outlook for distribution growth. The company has been raising the dividend for the last 7 years and is only paying about 25% of its earnings. In this light, a move to the bottom of the range (or a confirmation of support inside the range) could be an attractive entry point for long-term and/or income investors.
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