Software giant Oracle (ORCL) will report fourth quarter fiscal 2021 earnings results after the closing bell Tuesday. Driven by renewed cloud interest ,Oracle shares have surged 37% over the past six months, more than doubling not only the 16% rise in the S&P 500 index, its performance has vastly outperformed the 14.7% rise in the Technology Select Sector SPDR ETF (XLK).
The company is in the third year of this multi-year transition to a cloud subscription-based model. Now up 28% year to date and trading near 52-week highs, the database giant must demonstrate its cloud fundamentals can sustain its recent growth rate, especially given the fact that the stock is trading at a premium to its historical valuation. Oracle is nevertheless being given the benefit of the doubt on the assumption that it can execute a similar cloud transition to how Microsoft (MSFT) was able to a decade ago.
Oracle’s cloud strategy, which is highly focused on customer retention and migrating existing on-premises customers to the cloud, remains a key factor in assessing the stock’s premium potential. As such, progress in each key cloud areas such as Oracle Cloud Infrastructure segment, the company’s public cloud service, which competes with the likes of Amazon (AMZN), Microsoft and Alphabet (GOOG , GOOGL), will be a key area of focus on Tuesday. Oracle’s Autonomous Database solution is another area of interest for targeted growth.
While Oracle's quarterly profits have topped consensus estimates consistently, the investors will be more interested to the degree to which Oracle can effectively compete with entrenched cloud incumbents such as Salesforce (CRM), Workday (WDAY), while staking a larger share of the cloud market. In other words, for the stock to to keep rising, aside a top- and bottom-line beat Tuesday, Oracle guidance for 2021 must suggest it is ready to stake a legitimate claim to the cloud market.
In the three months that ended May, Wall Street expects Oracle to earn $1.31 per share on revenue of $11.04 billion. This compares to the year-ago quarter when earnings came to $1.20 per share on revenue of $10.44 billion. For the full year, earnings are projected to rise 16% year over year to $4.46 per share, up from $3.85 a year ago, while full-year revenue of $40.3 billion would rise 3.1% year over year.
The projected revenue growth of 5.8% and 3.1% for the quarter and full year, respectively, pale in comparison to the numbers delivered by Oracle’s cloud rivals. Oracle's slow cloud transition has weighed on its growth over the past three quarters. And Oracle’s revenue growth has yet to reach pre-pandemic revenue levels. But the company has surpassed analysts expectations, including Q3 revenues of $10.09 billion, which beat consensus estimates by $20 million. Likewise, adjusted EPS of $1.16 was a solid 5 cents above consensus.
The key in the quarter was Oracle’s Cloud services and license support revenue fell a bit shy of estimates, despite rising 5% year over year to $7.25 billion. Cloud license and on-premise license, however, managed a small beat with revenue of $1.28 billion rising 4%, topping forecast of $1.21 billion. Oracle’s Fusion and NetSuite Cloud ERP applications businesses, which are strong contributors to Oracle’s bottom line, grew revenue 30% and 24% respectively.
On Tuesday investors will want to see more growth acceleration in both categories, along with meaningful evidence that Oracle can become a cloud powerhouse.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.