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Oracle (ORCL), the large relational database software giant, announced its third quarter 2024 earnings after the market closed on Monday evening, March 11, 2024.
According to LSEG’s analyst consensus, it is expected to:
- income: Estimated annual revenue of $13.3 billion Growth 7%
- Operating companies: US$5.7 billion, expected to grow by 10% annually
- Earnings per share: At $1.38, earnings per share are expected to increase 13% annually.
Last quarter, Oracle’s revenue grew by 5%, operating income grew by 9%, and earnings per share grew by 11%.
OCI (Oracle Cloud Infrastructure) grew 71% year over year in fiscal Q2 ’24, while legacy business (i.e. on-premises, etc.) was down 19% year over year, and that’s the story.
Oracle is still digesting Cerner, which closed the Nov’22 quarter, so the numbers (i.e. free cash flow, capex, fully diluted shares outstanding) should start to return to normal. (This blog includes capital expenditure acquisitions, so Cerner’s $30 cost would be Distorted free cash flow in the November ’23 quarter, which is now behind us. )
When you think of the cloud space, you see AWS (Amazon Web Services), Azure (Microsoft), Google Cloud, and OCI, and you might have to think that they are behind those three cloud businesses, and the first two are behind than the first two. A whole lot.
That doesn’t mean you want to count out Larry Ellison and Safra Katz, even though Oracle lags behind other competitors, all of which are very strong, and then you have to wonder how artificial intelligence will change the competitive landscape. Artificial intelligence is part of the cloud, and I don’t know if Oracle has articulated any specific AI strategy, but you have to assume that this topic will start to come up on conference calls.
One of the great things about Oracle is that its operating margins are in the range of 40% to 40%, which is better than Microsoft (MSFT) and Adobe (ADBE).
Oracle peaked in June and September 2023 at $127 per share. Today, Oracle is trading above its 50-day and 200-day moving averages, and while the stock is up about 7% year-to-date, there’s little enthusiasm among large-cap tech stocks right now.
For those readers who are more traders than investors, Oracle’s fiscal fourth quarter, which ends in May each year, is usually a big quarter for them. Last year, in the fourth fiscal quarter ending in May 2023, revenue increased by 17% year-on-year (part of the growth was due to the integration of Cerner), and operating profit margins jumped to 45%.
Valuation: Earnings per share growth is expected to be 11% (on average) over the next three years, and the stock trades at an average P/E of 18, so the stock is a bit cheap relative to its projected growth rate. Revenue is expected to grow by an average of 8% in the next three years.
The significant impact on valuation will be that with the acquisition of Cerner and its integration into Oracle, gross margins, currently 72%, will return to the normal 78% – 80%, while operating margins are currently in the low 40% range. , should drift back to the high 40% range.
Summary/Conclusion: In technology, it’s often difficult to invest in a third or fourth competitor in a given field, although in software this may be easier than hardware. When it comes to hardware, you always want to buy from low-cost manufacturers.
Today, Oracle is like Cisco (CSCO) (in many ways), but if we use Michael Porter’s competitive strategy analysis, Oracle – to me – seems to be stuck in the middle, so to speak, and is struggling to build the cloud, while not letting the legacy business dry up completely.
For short-term trading, there are many positives for Oracle, namely that the technical picture remains intact and the stock is not seeing enthusiasm from the AI crowd; gross margins and operating margins will expand over the next 4-8 quarters, and as As the company consolidates and returns to “pre-Cerner” levels.
One of the most compelling aspects of the stock, though, is that Oracle’s long-term performance tends to be in line with the S&P 500 over long periods of time. Oracle released a profit preview in September 2023, with the stock’s double top occurring in the June 2023 and September 2023 time frames.
Since Microsoft is the largest customer, it doesn’t make much sense to own a large stake in Oracle. That being said, if you compare Oracle’s long-term performance to the S&P 500, from January 1, 2000 to December 31, 2023, and then from January 1, 2010 to December 31, 2023, Oracle’s The annualized return is just one basis point below the S&P 500’s total return.
From a performance perspective, the stock has performed well. Perhaps the disruption of artificial intelligence will change this dynamic.
Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
