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Making Sense of Oracle's (ORCL) Earnings and What It Means for Investors

In light of the recently revealed fiscal second-quarter results by the leading software giant Oracle Corp (ORCL) and the optimistic outlook for the software industry, driven by robust demand for cloud-based solutions, should investors consider adding the stock to their portfolio? Let’s find out…

Software giant Oracle Corporation (ORCL) unveiled its fiscal second quarter results on December 11, 2023. The company’s shares faced a setback on account of its revenue missing the street estimates despite a modest year-over-year increase, while the growth in its bottom line, on the other hand, was notably impressive.

In addition, ORCL witnessed a 17.9% year-over-year fall in its revenue from cloud and on-premises licenses. However, it demonstrated strong performance with a 12% year-over-year increase in its revenue from cloud services and license support.

Moreover, despite a slowdown in cloud revenue growth, company executives maintain an optimistic outlook for its prospects. ORCL Chairman and CTO Larry Ellison expressed bullish sentiment, stating that "demand is over the moon." Ellison revealed ORCL’s robust expansion plans, detailing the expansion of 66 existing cloud data centers and the construction of 100 new ones to address the rising demand.

Meanwhile, the company’s CEO, Safra Catz, said, "Demand for our Cloud Infrastructure and Generative AI services is increasing at an astronomical rate." She highlighted that the company's cloud businesses are currently operating at an annual revenue run rate approaching $20 billion, with the demand for cloud services continuing to experience unprecedented growth.

While some Wall Street analysts raised concerns amid the decline in the company's shares, Deutsche Bank analysts maintained their optimistic stance, citing Larry Ellison's announcement of two substantial deals, each amounting to around $1 billion, strong demand, and a commitment to sustaining over 50% growth in Oracle Cloud Infrastructure (OCI) for 'a few years' with an expanding scale.

Furthermore, ORCL formed a major partnership with leading tech giant Microsoft Corporation (MSFT) on September 14, providing customers with entry to MSFT’s cloud service, Azure. Both companies jointly introduced Oracle Database@Azure, offering customers direct access to Oracle database services operating on OCI within Microsoft Azure data centers.

This collaboration provides users with the performance, scalability, and workload availability benefits of Oracle Database on OCI, coupled with the security, flexibility, and top-notch services offered by Microsoft Azure, including advanced AI services like Azure OpenAI.

ORCL’s shares have surged 27.8% over the past year and 26% year-to-date to close the last trading session at $102.99.

Here are the financial aspects that could affect ORCL’s performance in the near term:

Strong Financials

For the second quarter of fiscal 2024, which ended on November 30, 2023, ORCL’s total revenues increased 5.4% year-over-year to $12.94 billion, while its operating income rose 17.9% from the year-ago value to $3.62 billion.

Moreover, the company’s net income and EPS amounted to $2.50 billion and $0.89, up 43.8% and 41.3% from the prior-year quarter, respectively. Also, its income before income taxes grew 26.9% year-over-year to $2.72 billion.

Upbeat Analyst Forecasts

The consensus EPS estimate of $1.38 for the fiscal third quarter (ending February 2024) represents a 12.9% increase year-over-year. While the consensus revenue estimate of $13.29 billion for the same quarter reflects a 7.2% year-over-year improvement.

Solid Historical Growth

Over the past three years, ORCL’s revenue and EBITDA have grown at CAGRs of 9.4% and 5.4%, respectively. In addition, the company’s net income and EPS have improved at CAGRs of 21.5% and 30.7% over the past five years, respectively.

Robust Profitability

The stock’s trailing-12-month net income margin of 19.63% is 737.1% higher than the 2.35% industry average. Its trailing-12-month EBIT margin of 28.65% is 500.2% higher than the industry average of 4.77%. Furthermore, ORCL’s trailing-12-month Return On Total Asset (ROTA) of 7.55% is significantly higher than the 0.31% industry average.

Discounted Valuation

In terms of forward non-GAAP PEG, ORCL is trading at 1.41x, 29.2% lower than the industry average of 1.99x. Likewise, its forward EV/EBIT multiple of 17.22 is 11.9% lower than the industry average of 19.54. Furthermore, its forward Price/Cash Flow multiple of 14.93 is 29.8% lower than the industry average of 21.28x.

POWR Ratings Exhibit Solid Prospects

ORCL’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ORCL has a B grade for Sentiment, in sync with the positive analyst estimates for its to-be-reported quarter.

Within the Software - Application industry, ORCL is ranked #28 out of the 132 stocks.

Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Momentum, Stability, and Quality. Get all ratings of ORCL here.

Bottom Line

Despite the second quarter revenue missing street estimates, ORCL’s fundamentals remain strong, backed by the company’s strategic expansion initiatives, significant collaborations with major tech companies, and robust demand for its cloud services.

Furthermore, ORCL’s impressive financial performance, consistent historical growth, positive analyst estimates for the upcoming quarter, strong profitability, and discounted valuation collectively position it as an ideal investment choice.

How Does Oracle Corporation (ORCL) Stack Up Against Its Peers? 

While ORCL has an overall grade of B, equating to a Buy rating, you may also check out these other stocks within the Software - Application industry: eGain Corporation (EGAN), TeamViewer SE (TMVWY), and Commvault Systems, Inc. (CVLT), with an A (Strong Buy) rating. For exploring more Software - Application stocks, click here.      

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

ORCL shares were trading at $100.80 per share on Thursday afternoon, down $2.19 (-2.13%). Year-to-date, ORCL has gained 25.19%, versus a 24.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Mukherjee

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.


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