Why Oracle Isn’t a Buy After the Drop - InvestingChannel

Why Oracle Isn’t a Buy After the Drop

Proprietary Data Insights

Financial Pros’ Top IT Services Stock Searches in the Last Month

#1‘Microsoft Corp288
#2‘Oracle Corp132
#3‘Palo Alto Networks Inc116
#4‘Zscaler Inc69
#5‘Fortinet Inc59
#ad Exclusive Report of Q2’s Most Popular Stocks

Oracle: A Great Business Overpriced

Oracle’s (ORCL) latest earnings announcement turned the heads of financial pros so quickly that it almost snapped their necks.

Search volume for the tech giant surged as the company delivered stellar growth…just not a blowout.

When they lowered their forecast, traders responded by chopping 10% off the share price.

Oracle is a valuation quagmire.

By most measures, it’s expensive, except when you compare it to its peers.

Yet, we aren’t convinced that’s a reason to buy an overvalued stock.

This is why…

Oracle’s Business

A powerhouse in the world of cloud solutions and software services, Austin-based Oracle Corporation operates in over 220 countries as the go-to software maven since it was founded in 1977. 

The company offers a complete cloud stack that runs the gamut from infrastructure to software layers.

Cloud infrastructure

Source: Oracle.Com

Effectively, their software and infrastructure support and enable all aspects of a business, from supply chains to finance, IT to HR.

They design integrated systems on-site and through the cloud, allowing companies to perform business functions and analyze its data.

Broken down, it includes: department support software, database management, middleware integration, developer tools, and software management

Oracle segments its business into the following areas:

  • Cloud and On-Premise Licenses (11% of total revenues) – This segment is your classic software licensing.
  • Cloud Services and License Support (70% of total revenues) – Here, Oracle offers cloud solutions and ongoing software support.
  • Hardware (7% of total revenues) – Oracle also provides hardware to optimize business operations.
  • Services (6% of total revenues) – From consulting to education, this segment aims to make clients’ Oracle experience as seamless as possible.

The Latest Scoop: Investors felt a jolt as Oracle missed its Q4 2023 revenue target, chalking it up mainly to a 10% YoY drop in license revenues. 

Efforts to grow the AI business weren’t able to offset revenue misses, Plus management lowered Capex and cloud growth forecasts, saying IT spending had slowed alongside longer timelines to build out its data centers.

Oracle’s Cerner healthcare technology acquisition in June 2022 for $28.3 billion has also weighed on earnings and has yet to truly boost Oracle’s bottom line.



Source: Stock Analysis

Oracle has put up solid growth numbers in the last few years despite its size, helping increase the company’s multiple.

That’s why the deceleration in growth concerned investors and sent shares plunging on the latest earnings release.

While margins remain high, they contracted with the acquisition of Cerner, though it does appear that free-cash-flow margins have improved.

Still, the $76.8 billion net debt load has ballooned in recent years.


Source: Seeking Alpha

A large chunk of that money went to cutting the total share count almost in half since 2014 (currently running at around $2.3-$2.7 billion a year) and kicking out $3.8 billion in annual dividends.

Surprisingly, interest expenses only grew from $2 billion in 2018 to $3.6 billion today.

Meanwhile, Oracle kicks out $17.7 billion in cash from operations while spending $8.3 billion in Capex, leaving them about $10 billion in free cash flow, more than enough to support the dividend, share buybacks, and pay down debt.



Source: Seeking Alpha

Despite a huge drop in share price, Oracle still trades at lofty valuations, though not as bad as many of its peers.

It’s certainly cheaper than Microsoft (MSFT), Palo Alto Networks (PANW), Zscaler (ZS), and Fortinet (FTNT) on a P/E basis.

Yet, it’s only slightly cheaper than FTNT on a price-to-cash flow basis.



Source: Seeking Alpha

Oracle doesn’t offer the breakneck revenue growth of any of its peers, save maybe MSFT in the short-term. 

However, it’s projecting EPS and EBITDA growth next year, which is important given its slower revenue growth.



Source: Seeking Alpha

When it comes to profitability, Oracle blows away its peers in many cases on P&L profitability.

However, its free cash flow margin is the worst of the group, which is a bit of a head-scratcher.

Our Opinion 6/10

There are many things to like about Oracle…except it’s share price.

We expect Enterprise AI Cloud growth to be a key driver over the next 5-10 years.

However, the company needs to get Cerner to deliver more value sooner while improving the company’s overall margins.

Despite a 6/10, we’d be cautious taking a position in the company until it gets back closer to $90 per share.

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