Source: PaxForex Premium Analytics Portal, Fundamental Insight
Oracle's latest earnings report, released on Dec. 12, impressed investors. For Q2 of fiscal 2023, which ended Nov. 30, revenue rose 18% YoY (25% in constant currency) to $12.3 billion and topped analysts' forecasts by $260 million. Adjusted earnings per share remained flat at $1.21 but beat the consensus estimates by four cents.
Oracle shares rose after the report, but they have fallen more than 20 percent in the past 12 months. They still look cheap at 16 times earnings estimates and yield a decent dividend yield of 1.6%, but is it really a good buy in these market conditions? Let's break it down.
Oracle was once considered an aging technology company that generated weak growth from on-site database software and hardware. But over the past few years, it has transformed its on-premises software into cloud services, the database titan has revved this evolution through major acquisitions and expanded its ecosystem of cloud-based enterprise resource planning (ERP) services to retain its customers.
This transformation has allowed Oracle to once again achieve solid sales growth. After dropping 1% in fiscal 2020, its revenues grew 4% in fiscal 2021 and another 5% in fiscal 2022 (which ended May 31). That improvement was driven by double-digit growth in cloud infrastructure, Fusion ERP, and Netsuite ERP services, which offset slower growth in traditional on-premises software and hardware products.
In June of this year, Oracle acquired Cerner for $28 billion to expand its presence in the healthcare information technology market. The acquisition led to an 18 percent year-over-year increase in the company's revenue in both the first and second quarters of fiscal 2023.
On an organic constant currency basis, which excludes Cerner and the influence of the strong dollar, Oracle's revenues were still up 8% in Q1 and 9% in Q2. Remaining performance obligations (RPO), or revenue that the company has yet to recognize on its existing contracts, also grew 28% on an organic constant-currency basis in Q2 and accelerated from the 22% growth in Q1. This was achieved despite the fact that the company's exit from Russia reduced revenue growth by about one percentage point during both quarters.
This solid organic growth indicates that Oracle's core business remains more immune to macroeconomic factors than many of its competitors. For the full year, the company believes its cloud revenue will grow more than 30 percent organically in constant currency terms, compared with 22 percent growth in fiscal 2022.
For Q3 Oracle expects revenue to grow 17%-19% YoY and 21%-23% in constant currency. The company did not provide exact projections for organic growth.
Oracle's top-line growth looks stable, but the company's margins have shrunk because of the growing share of low-margin cloud services and Cerner integration. Its adjusted operating margin fell two percentage points to 47% in fiscal 2022 and then dropped to 40% in the first half of fiscal 2023. But during Oracle's latest conference call, CEO Safra Catz predicted that fiscal 2023 would be a "trough year" for its operating margins as it cuts spending on Cerner and "economies of scale" kick in for its cloud services.
This statement may remind investors of Microsoft, whose operating margins also fell to multi-year lows in 2016 when CEO Satya Nadella implemented his "mobile first, cloud first" strategy. But Microsoft's operating profitability has rebounded, and its stock has more than quadrupled in the past five years, as those efforts have paid off.
At the same time, Oracle's free cash flow (FCF) rose 18% YoY in Q2 to $8.4 billion, easily covering $2.2 billion in share repurchases and $3.4 billion in dividend payments over the past four quarters. The company also finished Q2 with $7.4 billion in cash and marketable securities, making it an attractive safe-haven as rising interest rates continue to punish loss-making companies with poor liquidity.
Analysts expect Oracle's fiscal 2023 revenue and adjusted earnings per share to grow 16% and 1%, respectively. In fiscal 2024, they expect revenue and adjusted earnings to grow 7% and 14%, respectively, as the company completes its acquisition of Cerner.
We have to take these estimates with a degree of skepticism, but Oracle's strong growth over the past three years indicates that the company is slowly evolving into a cloud company with a higher growth rate like Microsoft. The company may not be able to replicate Big Brother's growth anytime soon, but its steady growth, strong balance sheet, forward-looking strategies, and low valuation make Oracle an excellent buy option as macroeconomic factors continue to negatively impact the technology sector.
As long as the price is above 79.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 81.69
- Take Profit 1: 85.00
- Take Profit 2: 88.00
Alternative scenario:
If the level of 79.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 79.00
- Take Profit 1: 76.00
- Take Profit 2: 73.00
