Software major Oracle (ORCL) reported better-than-expected earnings in the third quarter, but its revenue fell short of analysts’ estimates. The company signed several large-scale cloud infrastructure deals during the third quarter and expects to sign more in the coming quarters. With ORCL expected to close out fiscal 2024 strong, should investors consider buying the stock post-earnings? Keep reading.
Oracle Corporation (ORCL) reported third-quarter results on March 11. The company comfortably beat consensus EPS estimates, but its revenue fell short of Wall Street estimates. In this article I discussed why it might be prudent to buy the stock now despite missing the consensus revenue estimate.
For the third quarter, ORCL’s EPS came in 2.4% higher than consensus estimates, but its revenue fell slightly short of analysts’ estimates. The company has continued its stellar earnings history, beating the consensus EPS estimate in each of the following four quarters. Its remaining performance obligations, which indicate booked revenue, rose 29% to $80 billion in the third quarter.
Safra Catz, CEO of ORCL, said: “Large new cloud infrastructure contracts signed in the third quarter led Oracle’s total remaining performance obligations to rise 29% to more than $80 billion – an all-time record “. For the first time, ORCL’s cloud revenues exceeded traditional software licensing revenues.
“We expect to continue to receive large contracts that reserve cloud infrastructure capacity because demand for our Gen2 AI infrastructure substantially exceeds supply, even as we are opening new cloud data centers and expanding existing ones very, very rapidly,” he said. added.
The CEO also said that the company expects 43% of the current $80 billion in remaining performance obligations to be recognized as revenue over the next four quarters and that its Gen2 Cloud Infrastructure business will remain in a hypergrowth phase for the foreseeable future. . ORCL President and CTO Larry Ellison said, “In the third quarter, Oracle completed the transition of the majority of Cerner customers to Oracle’s Gen2 cloud infrastructure.”
“In the fourth quarter, Oracle will begin shipping its all-new Ambulatory Clinic Cloud Application Suite to these same customers. This new AI-powered system features an integrated voice interface called Clinical Digital Assistant that automatically generates doctors’ notes and updates electronic health records, saving valuable time and improving the accuracy of healthcare data,” he added.
Ellison added that the delivery of this revolutionary new healthcare technology will enable the rapid modernization of its customers’ healthcare systems over the next year and transform Cerner and Oracle Health into a high-growth company for years to come.
For the fiscal fourth quarter, ORCL expects non-GAAP earnings of $1.62 to $1.66 and total revenue, including Cerner, to grow between 4% and 6%. As capacity increases online, ORCL expects total cloud revenue, excluding Cerner, to grow between 22% and 24%.
Analysts at William Blair have upgraded their rating on ORCL to “Outperform”. They said: “Positive commentary on demand and strong booking growth support Oracle’s structural change that positions the company well for sustained acceleration in revenue growth.”
ORCL shares have gained 21.9% over the past three months and 47.8% over the past year, closing the latest trading session at $125.52.
Here’s what could influence ORCL’s performance in the coming months:
Robust financials
ORCL’s total revenues for the fiscal third quarter ended February 29, 2024 increased 7.1% year-over-year to $13.28 billion. Its non-GAAP operating profit increased 11.7% from the prior-year quarter to $5.79 billion. The company’s non-GAAP net income increased 17.7% year over year to $3.98 billion. Additionally, its non-GAAP EPS came in at $1.41, up 15.6% year over year.
Favorable analysts’ estimates
Analysts expect ORCL’s EPS and revenue for fiscal 2024 to increase 9.1% and 6.6% year over year, to $5.59 billion and $53.27 billion, respectively. EPS and revenues for fiscal 2025 are expected to increase 11.6% and 8.6% year over year, to $6.23 billion and $57.85 billion, respectively.
High profitability
In terms of trailing 12-month gross profit margin, ORCL’s 71.53% is 46.7% higher than the industry average of 48.76%. Likewise, its trailing 12-month EBITDA margin of 39.61% is 330.7% higher than the industry average of 9.20%. Furthermore, the stock’s trailing 12-month EBIT margin is 29.15% and is 503.4% higher than the industry average of 4.83%.
Mixed rating
In terms of forward non-GAAP P/E, ORCL’s 22.47x is 9.7% lower than the industry average of 24.87x. Likewise, its forward non-GAAP PEG of 1.75x is 11% lower than the industry average of 1.96x. Additionally, its forward EV/EBIT of 18.42x is 8.7% lower than the industry average of 20.18x.
However, ORCL’s EV/Forward Sales is 7.95x and is 172.2% higher than the industry average of 2.92x. Furthermore, its Forward Price/Sales of 6.48x is 121.1% higher than the industry average of 2.93x. Furthermore, its forward P/B of 39.36x is 802.6% higher than the industry average of 4.36x.
Mixed historical growth
Over the past three years, ORCL’s revenues have grown at a CAGR of 9.8%. Its EBITDA has grown at a CAGR of 5.7% over the past three years. Furthermore, over the same time frame, its total assets grew at a CAGR of 5.1%.
On the other hand, ORCL’s net profit has contracted at a CAGR of 6% over the past three years. Furthermore, its EBIT has contracted at a CAGR of 0.2% over the past three years. Furthermore, over the same time frame, its EPS has contracted at a CAGR of 3.3%.
POWR ratings are promising
ORCL has an overall rating of B, equivalent to a Buy in our POWR rating system. POWR ratings are calculated by considering 118 different factors, each optimally weighted.
Our proprietary rating system also evaluates each security based on eight distinct categories. ORCL has a grade of B for Sentiment, which is consistent with analysts’ favorable estimates. It has a B quality grade, which is in keeping with its high profitability.
Its mixed historical growth justifies its C grade in terms of growth. Additionally, ORCL has a B grade for stability, consistent with its 0.99 beta.
ORCL is ranked #50 out of 132 stocks in the Software – Applications industry. Click here to access ORCL’s Value and Momentum ratings.
Bottom line
ORCL expects solid business growth in the coming years and expects annual revenue of approximately $65 billion and an operating margin of 45% by fiscal 2026. It also expects annual EPS growth in excess of 10%.
Despite the opening of new cloud data centers and the continued expansion of existing ones, demand for the company’s AI Gen2 cloud infrastructure is outpacing supply. Additionally, ORCL’s partnerships with NVIDIA and Microsoft are helping to increase usage of its cloud offerings and allow customers to migrate to its autonomous database.
CTO Ellison said ORCL will eventually have more data centers and cloud regions than all other hyperscalers combined.
Given its strong financials, favorable analyst estimates, and high profitability, it might be wise to buy the stock now.
How does Oracle Corporation (ORCL) Can it hold its own against its peers?
While ORCL has an overall grade of B, equivalent to a Buy rating, you can also check out these other stocks rated A (Strong Buy) or B (Buy) in the Software – Applications sector: eGain Corporation (EGAN), Karooooo Ltd (KARO ) and Docebo Inc. (DCBO). To explore additional Software – Applications titles, click here.
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ORCL shares rose $1.34 (+1.07%) in premarket trading Thursday. Year to date, ORCL has gained 19.52%, compared to an 8.55% gain in the benchmark S&P 500 index over the same period.
About the author: Dipanjan Banchur
Ever since he was in primary school, Dipanjan was interested in the stock market. This led him to earn a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a keen interest in reading and analyzing emerging trends in the financial markets.
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