Here’s Why Oracle Stock Is Going Crazy
For the most part, since entering 2016, Oracle Corporation (NYSE:ORCL) stock wasn’t the hottest commodity in tech. But on Friday morning, Oracle stock climbed nearly three percent. Why? The company just reported its earnings.
The best part about this is that based on its outlook, the upward momentum in ORCL stock could be just getting started.
The tech giant reported its quarterly earnings after the closing bell on Thursday. Revenue came in at $10.59 billion, down one percent year-over-year but above Wall Street’s expectation of $10.47 billion. The company’s bottom line improved by 3.8% year-over-year to $0.81 in adjusted earnings per share, matching analysts’ estimates. (Source: “Q4 FY16 Earnings Press Release and Financials,” Oracle Corporation, June 16, 2016.)
Today, many companies—whether in technology or not—are moving their computing needs to the cloud and Oracle happens to be one of the biggest winners in this shift.
In the reporting quarter, Oracle’s cloud software as a service (SaaS) and platform as a service (PaaS) revenue surged 66% year-over-year to $690 million. After including infrastructure as a service (IaaS), total cloud revenue was $859 million, up 49% from the year-ago period.
The company also added more than 1,600 new SaaS customers and more than 2,000 new PaaS customers in the quarter. This means Oracle now has nearly 2,600 “Fusion ERP” customers, which, according to CEO Mark Hurd, is 10 times more than that of Oracle’s competitor Workday Inc (NYSE:WDAY).
The good news is that last quarter’s strong bookings in the cloud business allow the company to raise its guidance. Oracle expects its current quarter SaaS and PaaS revenue growth to be between 75% and 80% year-over-year.
Of course, Oracle is not the only company chasing the gains in the cloud business. Amazon.com, Inc. (NASDAQ:AMZN), for instance, also has a booming cloud segment called “Amazon Web Services” (AWS). In the first quarter of 2016, net sales from Amazon’s AWS surged 63.9% year-over-year to $2.57 billion. (Source: “Amazon.com Announces First Quarter Sales up 28% to $29.1 Billion,” Amazon.com, Inc., April 28, 2016.)
Still, Oracle’s founder, executive chairman, and chief technology officer, Larry Ellison, is upbeat about the company’s future growth in cloud computing:
“We expect that the SaaS and PaaS hyper-growth we experienced in FY16 will continue on for the next few years,” he said. “That gives us a fighting chance to be the first cloud company to reach $10 billion in SaaS and PaaS revenue. We’re also very excited about the availability of version 2 of Oracle’s Infrastructure as a Service (IaaS)—which will enable us to speed up the growth of our IaaS business, which customers want to buy in conjunction with our SaaS and PaaS.” (Source: Oracle Corporation, op cit.)
With increasing competition in the cloud business, you’d expect margins to deteriorate. But as it turned out, Oracle’s gross margin for SaaS and PaaS was 57% in the quarter, up from 40% in the year-ago period. In the earnings conference call, Oracle’s chief executive officer, Safra Catz, said that the company expects further improvements in those numbers, with the long-term target being an 80% gross margin in SaaS and PaaS. (Source: “Oracle’s CEO Safra Catz on Q4 2016 Results – Earnings Call Transcript,” Seeking Alpha, June 16, 2016.)
Good results, especially in the cloud segment, made Wall Street analysts quite bullish on Oracle stock.
Goldman Sachs Group Inc (NYSE:GS) analyst Heather Bellini reiterated her “Buy” rating on Oracle stock with a $48.00 price target, representing a more than 20% potential upside. She said, “We view FY17 as a turning point in ORCL’s cloud transition as we expect the increase in SaaS/PaaS revenue to be greater than the decline in on-premise revenue.” (Source: “Oracle Rising on FYQ4 Beat; Is This the ‘Turning Point’ for the Stock?,” Barron’s, June 17, 2016.)
Richard Davis, an analyst at Canaccord Genuity, pointed out that Thursday’s earnings report would help Oracle regain investor confidence. He had a “Buy” rating on ORCL stock with a price target of $45.00.
“Our BUY rating is predicated on the assumption that this bullish psychological momentum will return, the multiple will expand a point or two, and the stock will advance,” said Davis. “We believe ORCL is at least an interesting near-term investment based on that scenario.” (Source: Ibid.)
The Bottom Line on Oracle Stock
Trading at $39.76 on Friday afternoon, ORCL stock carries a price-to-earnings (P/E) multiple of 19.55X. If you use its forward earnings, the company has a forward P/E of just 13.07X—not a high number given its long-term projection of the profitable cloud business. Also, as a mature company, Oracle offers a dividend yield of 1.52%.
If you want to invest in the cloud computing business but don’t want to pay absurdly high multiples for earnings, you should take a serious look at Oracle stock.