Oracle Earnings Exceed Expectations as Cloud Business Growth Rate Doubles

Oracle Stock at a Glance

• Fair Value Estimate: $76
• Morningstar Rating: 1 star
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow

Oracle Stock Update

Narrow-moat Oracle’s ORCL fourth quarter exceeded expectations on the top and bottom lines, as the growth rate of its nascent cloud infrastructure business nearly doubled from last year, showing solid health. Nonetheless, our concerns remain for what we believe is a more limited upside to the cloud infrastructure market than what the market is baking in. Even with this concern in mind, we are raising our fair value estimate to $76 from $67 per share after accounting for the time value of money as we roll our model ahead. However, with shares up by more than 80% over the trailing 12 months, we still strongly believe they are significantly overvalued, in 1-star territory. We reiterate our belief that Oracle is a moaty, sticky company, but we still think switching costs are vulnerable in its core enterprise resource planning and database markets as enterprises shift their workloads to the cloud, spurring them to think about how to best meet their software needs.

Earnings per share exceeded management’s guided midpoint by a moderate $0.06, while revenue increased by 17% year over year to $13.8 billion. The highlight of the quarter was the acceleration of cloud infrastructure growth, which rose 77% year over year. Notably, consumption of Gen 2 cloud infrastructure is now seven times larger than it was in 2020. We think these metrics are strong, but the health of this newer business for Oracle over the next few years is not our primary concern. Ultimately we look to the long term, where we think the potential of its cloud infrastructure business is capped. We believe Oracle’s larger cloud infrastructure competitors have ample first-mover advantages, and that more general workloads will be harder to compete for.