Wednesday, December 17, 2014

Oracle Earnings: Don’t Expect Anything Impressive From ORCL


New subscription business models will continue to weigh on ORCL.


Oracle Corporation (ORCL) is a $183 billion technology giant headquartered in Redwood City, California, and has been providing hardware and software solutions to hundreds of thousands of companies worldwide — including all 100 of the Fortune 100.

ORCL is expected to report its FY2015 second-quarter earnings after the bell on Dec. 17.

However, after a dismal first-quarter report that led to sizable Oracle stock losses, analysts and investors alike haven’t been too excited about the impending release.

The Cloud is Getting Crowded


Oracle’s shift from traditional license sales to a cloud-based subscription model has been a slow process, and Oracle stock prices have reflected the company’s challenges along the way. ORCL is in favor of the cloud-based model because such subscriptions have the potential to translate into significant lifetime revenue from those customers.

As the number of players in the cloud-computing space continues to rise, ORCL runs the risk of losing customers to competitors such as Amazon.com, Inc. (AMZN), Google Inc (GOOG) and Microsoft Corporation (MSFT). Amazon recently claimed that its newest web service, dubbed Aurora, is just as capable as proprietary database products like those at Oracle, but for one-tenth of the cost. Google and Microsoft offer similar cloud technology solutions as well, but Oracle hired Google’s former engineering director in October as part of the company’s push to expand cloud offerings.

ORCL Earnings Expectations


Meeting expectations could breathe new life into Oracle stock. Looking at the long-term, ORCL has continued to successfully develop and sell its wares to the world’s largest corporations, and gross profit for the trailing 12 months has remained steady over the past several years — rising from $26 billion in early 2011 to $31 billion as of the last quarterly earnings report. Over the same period, free cash flow has risen from $9.5 billion to $14.7 billion and EPS has risen from $1.51 to $2.39.

Management is expecting revenue of $9.52 billion and EPS of 68 cents, compared to $9.28 billion and 69 cents, respectively, in the same quarter last year. The resulting year-over-year growth would be a 2.6% revenue boost, offsetting a 1.4% EPS slump.

Several analysts have given the company a neutral rating, and The Street went so far as to call Oracle stock a “roof leaker,” describing potentially massive losses stemming from emotionally-charged sales. But, it’s also relevant to note that, according to Reuters, Oracle stock’s mean recommendation rating is 2.38; 10 analysts call ORCL a buy, 16 call it a hold, and only one calls it a sell. The mean price target for Oracle stock is $43.68 — at 7.5% increase over prices as of this writing.

When Oracle earnings are announced, don’t expect to be blown away by impressive revenue or EPS figures. The company’s year-over-year EPS growth for the most recent quarter was a mere 2.4%, significantly lower than the industry average of 10.3% and sector average of 64%. ORCL’s PE ratio of 17 also lags the industry average of 25 and the sector average of 18. When Oracle earnings are reported, expect ORCL’s forward PE ratio to stay in the range of 13.

Bottom Line for Oracle Stock


Successfully preserving its current customer base and reducing prices to better compete with rivals should strengthen Oracle stock. However, low investor sentiment is a problem. Simply meeting expectations won’t be enough to move the needle very much, as investors seem to have become disenchanted with Oracle stock. Anyone looking for consistent and stable performance or dividends have better alternatives with which to strengthen their tech portfolios.

Because of these short-term challenges, Oracle earnings won’t be a home run, but they should be in line with analysts’ consensus and management’s guidance.

Article originally appeared on InvestorPlace.com (12/17/14)