Oracle Earnings: Cloud Demand Coming Along Nicely As Capacity Expansion Continues

Key Morningstar Metrics for Oracle

• Fair Value Estimate: $84.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Oracle’s Earnings

Oracle’s ORCL third-quarter results fell short of our aggressive estimates on the top and bottom lines but were closer to broader investor expectations. Shares surged after hours, likely based on the strong growth in cloud revenue and remaining performance obligations. Despite this recent performance, we maintain our fair value estimate of $84 per share and see the stock as overvalued. The firm is progressing well on initiatives in both Cerner and Oracle Cloud Infrastructure, which is in line with both what we anticipated for the quarter and our longer-term growth and margin cadence.

There is reason to be excited for the next several years, as cloud growth and bookings are impressive. In the third quarter, total revenue increased by 7% year over year in constant currency to $13.3 billion. Remaining performance obligations were up 29% year over year to more than $80 billion, which we view as a strong indicator of both good demand trends and revenue acceleration next year, which is already baked into our model. Like its enterprise software peers, Oracle said there was strength in large deals. Cloud revenue was up 2%, while cloud infrastructure revenue rose 49%—which we see as a highlight of the quarter, as clients are interested in Oracle Cloud.

Margin performance is solid, as improvements in cloud gross margins arising from scale drive year-over-year improvement, which we expect to continue over the next several years. But these improvements are already contemplated in our long-term estimates, so we have not changed our margin outlook. Oracle achieved a 43.6% non-GAAP operating margin in the quarter, compared with 41.8% a year ago and our estimate of 43.7%.