Source: PaxForex Premium Analytics Portal, Fundamental Insight
In September, Oracle, a prominent database and cloud company, experienced a 12% decline in its stock shares, according to data from S&P Global Market Intelligence. The primary catalyst for this decline was Oracle's release of its fiscal first-quarter earnings during that month.
Leading up to September and preceding the earnings announcement, Oracle had reached an all-time high in its stock price, driven by growing enthusiasm around artificial intelligence (AI). However, while Oracle continued to exhibit solid growth across its product portfolio, it failed to fully meet the high expectations set by both investors and analysts.
Throughout the year, Oracle had strategically positioned itself as a rising player in the AI landscape, alongside the three other major cloud infrastructure companies. This positioning was reinforced by its close partnership with Nvidia, one of the leading companies in AI technology. Oracle had been among the first cloud providers to offer Nvidia's DGX platform and other cloud-based services.
As a result, expectations were sky-high entering September. Although Oracle exceeded earnings-per-share expectations, its revenue fell slightly short of Wall Street's estimates. Revenue increased by a modest 8.7% compared to the previous year, a notable slowdown from the 18% growth observed in the previous quarter.
Upon closer examination, all of Oracle's business segments showed a slowdown relative to the previous quarter. The most significant deceleration occurred in its cloud software segment, with a growth rate of only 17%, compared to the previous quarter's impressive 47% growth. It's important to note that some of this slowdown was likely due to Oracle's integration of Cerner, a health information-technology company it had acquired in June 2022, which had contributed a full quarter of revenue in the previous period.
On the other hand, Oracle's cloud infrastructure segment, where the company aimed to compete with major infrastructure-as-a-service players in the AI era, exhibited robust growth of 64% in constant currency. Nevertheless, this also represented a mild deceleration from the 77% growth seen in the previous quarter. It's worth mentioning that the infrastructure segment accounted for approximately 12% of Oracle's total revenue.
The majority of Oracle's revenue continued to be generated by its core database business, which was undergoing a transition from on-premises to cloud-based solutions. Additionally, Oracle offered various back-office applications and enterprise resource planning products acquired over time. While these segments were stable and profitable, Oracle faced competition from emerging cloud companies.
Considering the substantial increase in the stock's value earlier in the year, the subsequent pullback in September was not entirely unexpected, particularly in light of the company's revenue performance falling short of lofty expectations.
Following the earnings release, some analysts came to Oracle's defense by highlighting certain factors contributing to the revenue miss. They pointed out that a portion of the revenue shortfall stemmed from Oracle's legacy on-premises business and its smaller hardware division, which, in the grand scheme, are not as crucial as the cloud infrastructure and software segments.
Additionally, some experts noted that Oracle was still in the process of integrating Cerner and transitioning its business to the cloud. This integration could result in revenue fluctuations, particularly as larger up-front licenses shift towards cloud-based subscription models.
In the broader context, Oracle's quarterly performance didn't appear to warrant panic, especially considering the significant increase in its stock price earlier in the year. The company continued to generate substantial free cash flow and maintained a comparatively lower valuation compared to many other software-as-a-service stocks.
However, there were two important factors that investors should monitor closely. Firstly, the competitive landscape in the database segment, where other cloud companies might become more competitive, could impact Oracle's position. Secondly, Oracle's ability to effectively compete in the cloud infrastructure space, especially as it currently holds a distant fourth place in this market, remains a key concern.
As long as the price is above 104.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 110.20
- Take Profit 1: 113.00
- Take Profit 2: 118.00
Alternative scenario:
If the 104.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 104.00
- Take Profit 1: 100.00
- Take Profit 2: 97.00
