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Stock Analyst Update

Hazy Results, Prospects for Oracle

Cloud revenue remains sluggish at the wide-moat firm, particularly when compared with competitors such as Microsoft, Salesforce, and Workday.


 Oracle (ORCL) reported fourth-quarter results that were slightly ahead of our expectations, though we came away from the quarter with no incremental clarity on the firm’s long-term prospects. Management continues to trumpet its bring-your-own-license model and reported solid metrics around its database and NetSuite business, but cloud revenue growth remains sluggish, particularly when compared with competitors such as Microsoft, Salesforce, and Workday. We are maintaining our wide moat and negative moat trend ratings for Oracle, and there is no change to our $46 fair value estimate. Shares are trading off roughly 4% on the heels of these results, but we do not see a compelling risk-reward trade-off at these levels.

Fourth-quarter revenue rose 3% versus the prior-year period to $11.25 billion, just ahead of our internal estimate. Management reclassified its revenue segmentation for the second time in the last year to better capture the impact of firm’s bringing their own licenses to the cloud, though it obscures the individual cloud segment performance. Cloud services and license support revenue rose 8% year over year to $6.8 billion. The firm has begun to see customers migrating licenses to Oracle data centers, meaning those customers will continue to make maintenance payments and Oracle will take hosting responsibilities for the software. While this strategy will pay dividends with certain customers, we do not view this as a compelling strategy for many enterprises, particularly if they cannot take full advantage of multitenancy in these environments. Further, cloud revenue was $1.7 billion (based on the firm’s prior revenue classification system), which was roughly in line with our below-consensus expectations. We were encouraged to hear management report 62% bookings growth for NetSuite and 9% growth in its database license business, but it will be difficult to ascertain the impact of this performance under the firm's new reporting standard moving forward.

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Rodney Nelson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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