- Oracle’s Low Bar Is Rising
The software giant’s stock has been the best performer in tech ahead of its next earnings report
https://www.wsj.com/articles/oracles-low-bar-is-rising-11615203000
No Paywall: https://archive.is/YHnfS#selection-317.5-348.1
Tech investors have been going old-school of late. Oracle Corp. will be the first to educate them on the wisdom of their bets.
The 43-year-old software giant heads into its fiscal third-quarter report this week in the rare position of being the hottest tech stock around. By Friday’s close, Oracle shares had jumped more than 8% for the week and are up more than 10% over the past month.
That makes Oracle a notable standout in a market that has suddenly taken to disfavoring many tech names—including the biggest. The Nasdaq is down 7% over the past month while the big-tech cohort of Apple Inc., Microsoft Corp. , Amazon.com Inc., Facebook Inc. and Google parent Alphabet Inc. averaged a drop of more than 5% in that time.
Investors generally have been spooked by rising bond yields and have been rotating out of high-valued names into more downtrodden ones. Oracle could certainly qualify as the latter, with its stock commanding less than 14 times forward earnings just a month ago—one of the lowest multiples in the software category. Other older, lesser-valued techs also have enjoyed a resurgence of late. Cisco Systems Inc., HP Inc. and International Business Machines Corp. averaged a 3% gain last week.
Oracle, however, also is believed to be at the beginning of an improving cycle of growth, as more of its traditional software business has slowly transitioned to the cloud. When the company reports results Wednesday afternoon, Wall Street expects revenue of $10 billion for the quarter ended in February, up nearly 3% year over year.
That sounds anemic next to the double-digit growth rates that even bigger software players such as Microsoft and Amazon’s AWS cloud-computing business have been generating of late. But it would be Oracle’s best growth rate in three years. Analysts also see the trend continuing. Revenue over the next four quarters is projected to average 2.7% growth year over year, according to FactSet. The most recent four quarters averaged a decline of 0.2%.
Oracle’s current reporting methodology makes its cloud business hard to decipher, as much of its recurring cloud-related revenue is lumped in with revenue from supporting its traditional software-licensing business. “However, we believe the ‘good’ cloud products are now big enough to offset the headwinds from the dwindling products, pushing overall growth higher,” wrote Barclays analyst Raimo Lenschow in a note upgrading Oracle to an “outperform” rating on Friday. Mr. Lenschow estimates that about two-thirds of Oracle’s stated cloud revenue now stems from “growth products, which means cloud revenue should accelerate going forward.”
Investors should note that Oracle has a mixed record when it comes to pleasing Wall Street. The stock price has dropped following eight of the past 12 quarterly reports, according to FactSet. Still, last year’s third-quarter report sparked the stock’s biggest single-day gain in more than a decade, as better-than-expected results came with a boosted share-buyback program. This time around, Oracle’s growth will need to speak louder than its checkbook.
Write to Dan Gallagher at dan.gallagher@wsj.com