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Summary

  • The bullish case for Oracle is simple, as businesses strive for growth, the growth process will always place more demand on IT services.
  • From an operational perspective, Oracle's results weren't as bad as the Street made them out to be.
  • Oracle remains incredibly profitable. And the guidance for the final quarter is encouraging.

Oracle's Growth Will Return

Database giant Oracle (NYSE:ORCL) disappointed investors on Tuesday with earnings and revenue that missed Street expectations. The stock was down more than 5% Tuesday after the close. And frustrated investors continue to wonder what else can go wrong with the enterprise software company.

Fiscal Third-Quarter Results

Oracle reported third quarter revenues of $9.3 billion, up 4% on the year before. But this wasn't enough to please investors. Analysts were looking for revenue of $9.36 billion. Oracle showed moderate strength in new software licenses and cloud software subscriptions. That business posted revenues of $2.4 billion, which was up 4% year over year. But that, too, was considered unimpressive.

Analysts like Daniel Ives of FBR Capital Markets wasn't impressed. Ives was looking for 7% growth in the cloud subscription business. He argued that the enterprise IT spending was strong enough to support this projection. Ives has been a notable critic of Oracle and believes that the company is being left behind by nimbler rivals like Salesforce.com (NYSE:CRM) and Workday (NYSE:WDAY).

But Ives overlooked some positives in Oracle's report. For instance, revenue from hardware systems products rose 8% to $725 million. This has been the first growth Oracle has experienced in that business in four years. This hardware growth accounts for 30% growth (on a constant currency basis) in the engineered server systems business. CEO Larry Ellison made certain that highlight this fact. He said:

"Our Engineered Systems business is growing rapidly for the same fundamental reason that our Cloud Applications business is growing rapidly. In both cases, customers want us to integrate the hardware and software and make it work together, so they don't have to."

Likewise, it's worth noting that Ellison has been extremely vocal about his intentions with Oracle. While the company has not demonstrated the growth that investors would like, management has been clear in its execution. Oracle is transitioning the business to stronger growth areas. What's more, Oracle's cloud software sales were actually up 25% year over year.

From an operational perspective, Oracle's results weren't as bad as the Street made them out to be. It's true that the company missed Wall Street's expectations for adjusted earnings per share. But GAAP earnings per share were up 8% to 56 cents. Likewise, non-GAAP earnings per share were up 5% to 68 cents per share.

Equally impressive is that fact that amid all of this anxiety about Oracle's future, it's encouraging that operating cash flow on a trailing twelve-month basis was up 10% to $15 billion. Again, where Oracle is perceived deficient in terms of revenue, the company has to forgotten how to make money. And when you consider that the revenue miss was by less than half a percentage point, there's clearly been an overreaction.

Looking ahead

For the current quarter, the company expects EPS (excluding items) to be in the range of 92 cents to 99 cents per share. Meanwhile, fourth-quarter revenue is projected to post year-over-year improvement of 3% to 7%. Analysts had modeled earnings of 95 cents and revenue of $11.5 billion, which suggests 5% growth.

Summary

The bullish case for Oracle is simple, as businesses strive for growth, the growth process will always place more demand on IT services. And as IT services get more complicated, it will require increased levels of expertise manage the enterprise. There is no other company more capable of delivering these services than Oracle.

All told, Oracle remains incredibly profitable. And the guidance for the final quarter is encouraging. As it stands, the stock looks incredibly cheap at 12-times forward earnings. On the basis improved cash flow and cloud-based software growth, I expect Oracle stock to trade at $42 by the end of the year.

Source: Oracle's Growth Will Return The Stock To $45 Per Share