Analyst Note| Julie Bhusal Sharma |
Oracle’s fourth quarter surpassed our GAAP earnings expectations--slightly due to revenue growth, but largely due to unforeseen tax benefits from several discrete items. While the reasons for the beat are mostly unexciting, management’s take on growth for its largest and most promising segment, cloud service and license support, for the next quarter, was higher than we expected, and prompts us to boost our confidence in top-line growth expectations. This growth increase is partially offset by incorporating a higher long-term tax rate of 24% based on our probability-weighted tax assumptions for the U.S. corporate tax rate. As a result, we are raising our fair value estimate to $65 per share from $58 per share for narrow-moat Oracle. Shares are down 5% upon the news, trading near $78, leaving the narrow-moat stock still overvalued, in our view. Notably, our fair value does not assume Oracle’s obsolescence due to increasing cloud workloads--but rather, include margin expansion and top-line growth. However, we still expect Oracle to lose market share as it does not keep pace with its rapidly expanding addressable market.