Oracle Corporation (ORCL): Cloud Computing Growth Is the Key

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Oracle Corporation ( ORCL ) reports earnings on Thursday, and if results top Wall Street forecasts again there's reason to expect ORLC stock to build on its market-beating ways.

Oracle Corporation (ORCL): Cloud Computing Is the Key

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Oracle stock had rough 2015. Shares fell nearly 20% as revenue languished on the company's transition to cloud-based services. This year, however, ORCL stock seems to be getting the benefit of the doubt for this epic strategic plan. Shares are up more than 6% for the year-to-date, while the S&P 500 managed a gain of less than 1.5%.

Analysts don't expect a big swing in revenue anytime soon. Rather, ORCL is becoming more profitable with several quarters of earnings-per-share growth to its credit.

Importantly, Oracle earnings have done this even as revenue has come up short. That suggests Oracle's strategy is paying off more quickly than analysts expect. Based on that, you could argue that estimates of future earnings are too low and - by extension - so is Oracle stock.

It feels like ORCL has been transitioning to cloud-based services forever. It's a tough process that weighs on results, but it is indeed working. Investors saw promising acceleration in its cloud business last quarter.

Besides, it's not like ORCL really has a choice but to move away from selling software that runs on customers' computers. Businesses want to run software on hardware owned and operated by Oracle and other cloud companies. It's more simple and cost effective.

ORCL Stock's Long Slog

Pivoting to the cloud is also a long and pricey process. Transitioning away from software licenses to cloud services requires a vast investment in data centers, for one thing.

Companies are also required to recognize revenue over the life of the contract. That can help smooth out revenue, but it also means no more big bumps from landing a big software sale.

That helps explain the continued misses on Oracle's top line. (The company has actually missed Street revenue estimates in seven of the last eight quarters.) It's not that ORCL isn't seeing strong growth in the cloud. It's that revenue from software licensing is declining faster than the cloud can replenish it.

For the most recent quarter, analysts on average expect Oracle earnings to come to 82 cents a share, according to a poll by Thomson Reuters. That's up from 78 cents a year ago. Revenue is forecast to slip 2.2% to $10.47 billion.

At the same time, sentiment on the name remains solid. Shares go for about 14 times forward earnings on a growth forecast of 7%. Of the 41 analysts covering Oracle stock, 22 have it at buy and 14 call it a hold.

With a median target price of $43.86, ORCL stock has implied upside of 13% in the next year or so. That's pretty good for a massive company in a mature business.

ORCL has made great strides in its transition to cloud-based services, and as long as it continues to show progress when the latest earnings land, the market will be happy.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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