Oracle Earnings: Cloud Capacity Catchups Leave More to Be Desired on Top Line

Key Morningstar Metrics for Oracle

• Fair Value Estimate: $83.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Oracle’s Earnings

Oracle’s ORCL second-quarter results were nuanced, with the top line coming in lower than our expectations while non-GAAP earnings per share estimates came in slightly better. Shares are down 8% due to the underwhelming revenue. Capacity constraints within the Oracle Cloud Infrastructure business were partially to blame. While Oracle has stressed how much OCI will drive its future growth, all strength in that business must work to offset weakness in the firm’s core enterprise resource planning and database software businesses. We think both these businesses are vulnerable since customers can use the migration to the cloud as a rare opportunity to leave Oracle.

While our top-line forecasts remain largely unchanged and still imply continuous market share declines in enterprise resource planning and database software, we have increased our estimates for longer-term GAAP margins. As a result, we have raised our fair value estimate of Oracle stock to $83 per share from $76. However, that increase still implies a significant overvaluation. We thus point investors to stocks we consider vastly more appealing, such as Snowflake SNOW, which we value at $231 per share.

During the quarter, revenue increased by 4% year over year in constant currency to $12.9 billion. OCI consumption was up 71%. Autonomous database performance was softer than expected, and we think this speaks to the elevated churn we suspect is occurring. Revenue for the Cerner business declined around 9% year over year, which was expected. Cloud license and on-premise revenue was down by 19% year over year in constant currency to $1.2 billion.