Oracle Earnings: Reported and Guided Revenue Come in Light; Stock Still Significantly Overvalued

Key Morningstar Metrics for Oracle

• Fair Value Estimate: $76.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Oracle’s Earnings

In its fiscal first quarter, Oracle’s ORCL revenue came in short of our expectations. The letdown on revenue combined with light top-line guidance for the next quarter sent Oracle stock tumbling immediately after the results.

But even with the market semicorrection, we think Oracle stock is still significantly overvalued. While Oracle’s cloud infrastructure revenue is growing the fastest of any of the firm’s segments, we think the market is overly optimistic about the level of cloud market share Oracle can get to in the long term. We aren’t undermining near-term growth potential, however, as we recognize the firm is going through a catch-up period on data center rollouts.

Altogether, we are maintaining our fair value estimate for the narrow-moat stock at $76 per share, as our more bearish outlook on information as a service, or IaaS, in the long term remains unchanged. We are eager to hear more details from management on the longer-term outlook at the financial analyst meeting day next week.

In the first quarter, revenue increased by 8% year over year in constant currency to $12.5 billion. Oracle cited supply issues when it comes to meeting demand for its data centers as the company is trying to build them out as quickly as possible. Nonetheless, its cloud infrastructure business was still able to grow at 64% in constant currency to $1.5 billion. While management touted its IaaS business as growing much faster than its peers, Oracle’s IaaS is still relatively small in revenue compared with its giant competitors. Non-GAAP EPS in the quarter was $1.19, which marked a 14% improvement in constant currency compared with the prior-year quarter.

Altogether, the top-line outlook for the second quarter was disappointing, in our view, which we think is likely also a result of data center rollout catch-up moderating IaaS growth in the near term. Management expects revenue growth at a midpoint of 4% year over year in constant currency and adjusted earnings per share of $1.32 at the midpoint. We think these are fair assumptions, given that the current conditions that brought in the moderate first quarter are likely to persist.

While Oracle’s IaaS business has been what’s top of mind for many, we think it’s important to note that the cloud’s potential is offset by what we forecast to be long-term increased competition in Oracle’s core revenue enterprise resource planning, or ERP, and relational database business.

Cautious Outlook for Oracle’s Legacy Core Businesses

We continue to believe Oracle’s ERP and database management software is undergoing weakening switching costs, eroding its moat, and giving way to churn of large customers. We think migrations to the cloud give rise to rethinking which technologies are the best fit for a firm, explaining why firms like Workday are gaining significant market share from legacy players.

Oracle’s management said on the earnings call that it has 95% of the ERP cloud market when counting enterprises who have gone live, however, we find this a difficult figure to swallow as Workday is purely a cloud-only platform and we estimate Workday and Oracle have roughly equivalent ERP market share when counting Oracle’s both cloud and on-premises ERP revenue. As a result, we caution investors when it comes to the outlook for Oracle’s legacy core businesses and think such caution should be paired with rosier IaaS headlines.