Software major Oracle ( ORCL ) reported better-than-expected earnings in the third quarter, but its revenue came in below analysts' estimates. The company signed several large-scale cloud infrastructure deals during the third quarter and expects to sign more in the coming quarters. With ORCL expected to end fiscal 2024 on a solid note, should investors consider buying the stock after earnings? Continue reading.
Oracle Corporation (ORCL) reported its third quarter results on March 11. The company handily beat the EPS consensus estimate, but its revenue came in below Wall Street estimates. In this piece, I've discussed why it might be prudent to buy the stock now, despite the lack of consensus earnings estimate.
For the third quarter, ORCL's EPS was 2.4% above the consensus estimate, but its revenue was slightly below analysts' estimates. The company continued its history of excellent earnings, beating the EPS consensus estimate in each of the following four quarters. Remaining performance obligations, which show retained earnings, rose 29% to $80 billion in the third quarter.
ORCL CEO Safra Catz said: “New new cloud infrastructure contracts signed in the third quarter increased Oracle's total remaining performance obligations by 29% to over $80 billion – an all-time record.” For the first time, ORCL's cloud revenue surpassed its traditional software licensing revenue.
“We expect to continue to receive large contracts reserving cloud infrastructure capacity because demand for our Gen2 AI infrastructure significantly outstrips supply – despite the fact that we are opening new and existing cloud centers many, many times quickly, he added.
The CEO also said the company expects 43% of its $80 billion in remaining performance obligations to be recognized as revenue over the next four quarters, and its Gen2 Cloud Infrastructure business will remain in a phase of excess growth to the foreseeable future. ORCL Chairman and CTO Larry Ellison said: “In the third quarter, Oracle completed the migration of the majority of Cerner customers to Oracle's Gen2 Cloud Infrastructure.”
“In the fourth quarter, Oracle will begin offering its new Cloud Ambulatory Clinic application suite to these same customers. This new AI-driven system features an integrated voice interface called Clinical Digital Assistant that automatically generates physician notes and updates Electronic Health Records – saving valuable time and improving health data accuracy,” he added.
Ellison added that the deployment of this revolutionary new healthcare technology will enable the rapid modernization of its customers' health systems over the next year and will transform Cerner and Oracle Health into a high-growth business for years to come.
For the fiscal fourth quarter, ORCL expects non-GAAP earnings to be between $1.62 and $1.66 and total revenue, including Cerner, to grow between 4% and 6%. As more capacity comes online, ORCL expects its total cloud revenue, excluding Cerner, to grow between 22% and 24%.
Analysts at William Blair raised their rating on ORCL to “here I go.” They said, “The positive demand commentary and strong bookings growth mean the structural change at Oracle positions the company well for a sustained acceleration in top-line growth.”
ORCL shares have gained 21.9% over the past three months and 47.8% over the past year to close the last trading session at $125.52.
Here's what could affect ORCL's performance in the coming months:
Strong finances
ORCL's total revenue for the fiscal third quarter ended February 29, 2024, rose 7.1% year over year to $13.28 billion. Its non-GAAP operating income rose 11.7% over the year-ago quarter to $5.79 billion. The company's non-GAAP net income rose 17.7% year over year to $3.98 billion. Also, its non-GAAP EPS came in at $1.41, representing a year-over-year increase of 15.6%.
Favorable analyst ratings
Analysts expect ORCL's fiscal 2024 EPS and revenue to grow 9.1% and 6.6% year-over-year to $5.59 billion and $53.27 billion, respectively. Its EPS and revenue for fiscal 2025 are expected to grow 11.6% and 8.6% year-over-year to $6.23 billion and $57.85 billion, respectively.
High profitability
As for offspring-12-months gross profit margin, ORCL's 71.53% is 46.7% higher than the industry average of 48.76%. Likewise, its trailing 12-month EBITDA margin of 39.61% is 330.7% higher than the industry average of 9.20%. Additionally, the stock's trailing 12-month EBIT margin of 29.15% is 503.4% higher than the industry average of 4.83%.
Mixed rating
In terms of non-GAAP forward P/E, ORCL's 22.47x is 9.7% lower than the industry average of 24.87x. Likewise, its 1.75x forward non-GAAP PEG is 11% lower than the industry average of 1.96x. Furthermore, its forward EV/EBIT of 18.42 times is 8.7% lower than the industry average of 20.18 times.
However, ORCL's 7.95x forward EV/Sales is 172.2% higher than the industry average of 2.92x. Also, its forward price/sales of 6.48 times is 121.1% higher than the industry average of 2.93 times. Furthermore, its forward price/book of 39.36x is 802.6% higher than the industry average of 4.36x.
Mixed historical growth
ORCL's revenue grew at a CAGR of 9.8% over the past three years. Its EBITDA grew at a CAGR of 5.7% over the past three years. Moreover, its total assets grew at a CAGR of 5.1% in the same time frame.
On the other hand, ORCL's net income shrank at a CAGR of 6% over the past three years. Furthermore, its EBIT shrank at a CAGR of 0.2% over the past three years. Moreover, its EPS shrank at a CAGR of 3.3% in the same time frame.
POWR Ratings Show Promise
ORCL has an overall rating of B, equal to a Buy in our POWR Ratings system. of POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal scale.
Our proprietary rating system also rates each stock based on eight different categories. ORCL has a Sentiment Rating of B, which is in line with its favorable analyst ratings. It has a B grade for Quality, which is in sync with its high profitability.
Its mixed historical growth justifies its C grade for Growth. Also, ORCL has a Stability grade of B, consistent with a beta of 0.99.
ORCL is ranked 50 out of 132 stocks in the Software – Application industry. Click here to access ORCL's value and momentum estimates.
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ORCL expects strong business growth over the next few years and has guided for annual revenue of approximately $65 billion and an operating margin of 45% through fiscal 2026. It also expects annual EPS growth of more than 10%.
Despite the opening of new cloud data centers and the continued expansion of existing ones, demand for the company's Gen2 AI cloud infrastructure is outstripping supply. In addition, ORCL's partnerships with NVIDIA and Microsoft are helping to increase the use of its cloud offerings and enable customers to migrate to its autonomous database.
CTO Ellison has said that ORCL will eventually have more data centers and cloud regions than all other hyperscalers combined.
Given its strong financial position, favorable analyst ratings and high profitability, it might be wise to buy the stock now.
How it works Oracle Corporation (ORCL) Stack up against her colleagues?
While ORCL has an overall grade of B, equivalent to a Buy rating, you can also check out these other stocks rated A (Strong Buy) or B (Buy) within Software – Application industry: eGain Corporation (EGAN), Karoooo Ltd. (with), and Docebo Inc. (DCBO). To explore more software – application repositories, Click here.
What should be done next?
43-year investment veteran Steve Reitmeister has just released his market outlook for 2024, along with his trading plan and 11 top picks for the year ahead.
Shares of ORCL were up $1.34 (+1.07%) in premarket trading on Thursday. Year-to-date, ORCL has gained 19.52%, versus a gain of 8.55% in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Since he was in high school, Dipanjani was interested in the scholarship. This led him to obtain a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a keen interest in reading and analyzing emerging trends in financial markets.
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