Oracle Earnings Miss Means Buy Now

| About: Oracle Corporation (ORCL)

Oracle (NYSE:ORCL) missed earnings and revenue expectations for the most recent quarter after a woeful performance from the new sales team. The company blamed the team tasked with sourcing for new sales for poor showing during the quarter as hardware revenues fell by 2%, coupled by 4% increase in sales and marketing expenses.

Oracle stock fell 9.7% on March 21, following the release of the most recent quarter results the previous day, closing at $32.20. The stock plunged even further to trade at just above $31 on March 27, but now seems to be bottoming up.

Pointing fingers

Oracle missed analyst estimates in new software sales and cloud-based subscription despite reporting significant growth in revenues for the two business units. The company has been quick to point to its new sales department for the mediocre performance, while there was also a considerable rise in key expense items.

Temporary plunge

Just like any other stock, there is no way I would have expected Oracle to absorb the earnings miss without heading south. It has always happened for a majority of the companies. The most important part is that this has so often proven to be temporary. So, is Oracle set to recover from this slump? Well, according to the company's long-term outlook, there is a clear path to prosperity.

The stock is now trading just under $32 per share on its way up. One good thing is that the daily trading volume average has reduced significantly. From a positive perspective is an indication of investors' willingness to hold on to the stock.

Oracle has been investing heavily over the last few years in acquisitions aimed at boosting the cloud and software business units. The company recently announced the acquisition of Acme Packet (NASDAQ:APKT), the maker of network equipments. Oracle seeks to speed up its voice, video and data delivery across all networks with this acquisition.

Oracle is one of the best managed companies judging by its steady growth over the years. The recent miss is nothing to cause a scare, but the blame pointed at the new sales business unit team poses some question marks on the company's strength - that is good management.

The slowdown in that unit could also be attributed to the fact that the company is just but trying to establish itself in the cloud marketplace, an industry that attracts several players due to the limited barriers to entry. Nearly all the computing companies, in different capacities, have shown an interest in this industry including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO), among others.

However, Oracle's acquisitions are well positioned and thus could play a huge part in boosting the company's market share in the cloud and software market. Nonetheless, Oracle should also be aware that Cisco has also been very active in acquisitions, as earlier discussed, and will be a strong competitor together with other industry giants.

ORCL Net Income Quarterly Chart
(Click to enlarge)

ORCL Net Income Quarterly data by YCharts

According to the statistics, Oracle's price seems to be moved by the shift in gross margin from one quarter to another. This pattern is well evident in period beginning 2010, through 2011 and 2012.And while the net income for the most recent quarter declined sequentially, gross margins increased from the previous quarter.

This further justifies why the most recent plunge is nothing more but temporary. Indeed, the stock is already on the recovery lane to $35 and above, and there is no reason why it shouldn't get there in the next two quarters to the maximum.

The Bottom Line

Despite the topsy-turvy situation of the stock over the past, a straight line would exhibit a constant growth, which means every plunge is often followed by a better rally, and rare are the occasions that the stock has traded in a new 52-week low.

Oracle's gross margin of 80% is above the industry average of 75%. The stock trades at 10.90x the company's earnings, and has trailing 12-months operating margin of 38.55%, well above industry average of -0.02%. Microsoft comes closer with 35%, but the rest are well below 30%.

The operating margin again justifies the company's excellent management practices, which have been the cornerstone of its continuous growth. Overall, Oracle is one of the most attractive stocks at the moment having fallen below its 20-day and 50-day moving average of about $34.70. The stock is also now trading below its 100-day moving average of about $33.50, which makes it even more attractive knowing that the plunge is only temporary.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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