With returns of 40% YTD and 52% over the past 12 months, Oracle (ORCL) stock has bested not only the S&P 500 index, it has also been one of the better-performing names among large-cap software tech. But can its popularity continue?
The software giant will report second quarter fiscal 2022 earnings results after the closing bell Thursday. Now in the third year of this multi-year transition to a cloud subscription-based model, the database specialist is finally being rewarded for its strong execution and increased cloud market share. Despite its out-performance, the shares still appear relatively undervalued, given the company's strong execution of the past three quarters.
During that span, Oracle has beaten consensus profit expectations each time, including a better-than 17% EPS beat in the most-recent quarters. This suggests Wall Street is still underestimating Oracle's growth metrics, particularly the company's ability to compete in the highly competitive cloud-based market where names such as Salesforce (CRM), Workday (WDAY) and Amazon (AMZN) currently dominate the Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) market.
Currently seen as a transformation play, based on its business transition towards a cloud subscription-based model, Oracle on Thursday must continue to demonstrate its fundamentals can sustain its recent growth rate. As such, while Oracle's quarterly profits have topped consensus estimates consistently, the market will be more interested in growth in each key cloud areas such as Oracle Cloud Infrastructure segment and the company’s public cloud service will be a key area of focus as assess the stock’s potential.
In the three months that ended October, Wall Street expects Oracle to earn $1.11 per share on revenue of $10.21 billion. This compares to the year-ago quarter when earnings came to $1.06 per share on revenue of $9.80 billion. For the full year, ending May 2022, earnings are projected to rise 1.5% year over year to $4.69 per share, down from $4.67 a year ago, while full-year revenue of $42.25 billion would rise 4.4% year over year.
The projected revenue increase of 4% for the quarter and the meager 4.4% revenue growth for the year doesn’t tell the entire story, particularly of the progress the company has made to narrow the gap between itself and Oracle’s aforementioned cloud rivals. Oracle's products such as its cloud applications continue to see 20% to 30% growth, offsetting declines in legacy segments. As such, the company’s long-term growth plan for revenue and profits is largely predicated on its ability to expand the cloud business segments.
In the first quarter, Oracle earned $1.03 per share on revenue of $9.73 billion. The results easily beat analysts estimates of 97 cents per share, but revenue just fell shy of the $9.76 billion estimate. Despite the 4% year-over-year revenue growth, the miss did raise some questions about the pace of the company's transition towards cloud-based services and subscriptions, it was encouraging that Netsuite, which Oracle acquired several years ago, is still growing revenue at a 26% year over year.
Just as impressive, Oracle produced $12.6 billion of free cash flow (over the trailing twelve months), up 9% year over year. On Thursday investors will want to see continued progress before the stock can move higher. But it does seem as if the share price has begun to reflect the company's recent execution, suggesting the market is becoming more confidence Oracle can sustain its recent success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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