- The recent Barron's article on Oracle's cloud effort has catalyzed the stock.
- Even with the installed base, Oracle is behind Amazon's AWS, Microsoft's Azure, and Google Cloud in terms of market share.
- Much of Oracle's growth has come from margin gains and share repurchases the last three years.
- Oracle's "quality of earnings" is actually pretty poor - surprising for a software company.
Oracle (NYSE:ORCL) reports its fiscal third-quarter '21 financial results after the closing bell on Wednesday, March 10, 2021.
Street consensus is currently expecting $10.07 billion in revenue and $1.11 in earnings per share for expected year-over-year growth of 3% and 16% respectively.
More importantly, Oracle's fiscal Q4 ending May every year is usually its strongest quarter of the year, and those consensus estimates currently expect $10.8 billion in revenue on $1.28 in earnings per share per year for expected year-over-year growth of 4% and 7% respectively.
The guidance for Q4 '21 will be critical on Wednesday night.
One thing that surprised me after the positive Barron's article on Oracle's cloud business was that forward EPS estimates for the database giant didn't improve from Q2 '21's estimates and in fact have been revised lower since the December '20 Q2 '21 financial results.
Forward EPS and revenue estimates for Oracle
|Q3 '21 est||Q2 '21||Q1 '21||Q4 '20|
|fy 2023 EPS est||$5.08||$5.13||$4.93||$.72|
|fy 2022 EPS est||$4.68||$4.71||$4.56||$4.41|
|fy 2021 EPS est||$4.36||$4.37||$4.21||$4.07|
|fy 2023 est EPS gro rt||9%||9%||8%||7%|
|fy 2022 est EPS gro rt||7%||8%||8%||8%|
|fy 2021 est EPS gro rt||13%||13%||9%||5%|
|fy 2023 PE||14x||12x||12x||12x|
|fy 2022 PE||15x||14x||13x||13x|
|fy 2021 PE||16x||15x||14x||14x|
|fy 2023 Revenue est||$42.5||$42.6||$41.0||$41.3|
|fy 2022 rev est||$41.1||$41.2||$40.1||$40.1|
|fy 2021 rev est||$40.09||$40.1||$39.3||$39.3|
|fy 2023 est rev gro rt||3%||4%||2%||3%|
|fy 2022 est rec gro rt||3%||3%||2%||2%|
|fy 2021 est rev gro rt||3%||3%||0%||0%|
- Source: Consensus estimates IBRES data by Refinitiv as pf 3/7/21
- Internal valuation spreadsheet
- fy = fiscal year ended May for Oracle
The one aspect to this data that stuck out was that - despite the bullishness around the stock - the full-year 2021 estimates have been revised lower since the December '20 or last earnings release.
As a caveat to this though, readers should note that since the March '20 lows for the S&P 500 and the various stock market indices, "analyst consensus" around S&P 500 estimates has been notoriously cautious and actual results have been far greater than consensus for the second, third and fourth quarters of 2020.
Will that hold for Oracle? That's hard to say. Just note there is a lot of bullish sentiment in the stock and the estimates look cautious as of right now.
|3-yr "avg" expected EPS growth||10%|
|3-yr "avg" expected rev growth||3%|
|3-yr "avg" expected PE||15%|
|% of market cap in cash||20%|
Source: internal valuation spreadsheet
Trading at a 15x multiple for an expected three-year average growth rate of 10%, Oracle's stock is not very expensive. The low dividend yield is probably sacrificed or is a function of the amount of money spent on the share buyback since tax reform passed in late 2017.
Share repurchase history
|fully dil shares o/s||y/y chg in f/d shares||y/y EPS gro||Cash % of mkt cap|
Source: internal valuation spreadsheet from earnings releases, 10-Qs, etc.
The point of this share repurchase table for readers is that the share repurchase program has been a formidable factor in Oracle's EPS growth the last 3 years or 12 quarters, as the database giant has been trying to find a permanent solution to the cloud, which has represented both a threat and an opportunity to the software giant.
Oracle margin history
As readers can see, Oracle's operating margin has increased 770 bps the last two quarters, a sharp increase for sure.
A note from the last conference call noted that "operating expenses" fell 7% y.y. Hopefully Oracle is cutting fat and not bone.
Oracle Quality of Earnings Test
This was a surprise given that Microsoft's cash-flow and free-cash-flow coverage of net income is well over 4x or 400% while Oracle's free-cash-flow coverage of net income often falls below 1x.
That is highly unusual for a software company unless it's very early-stage growth.
As readers can see from the history, occasionally the FCF coverage of net income exceeds 1x or 100% but the "average" since February '16 is just 81%
That's not good, but hopefully it's temporary.
Summary/conclusion: Morningstar recently changed its "moat" on Oracle from "wide" to "narrow", which is a pretty significant move for the software giant as there has been no doubt that the software giant has struggled with the cloud and organic license growth the last decade.
While it is easier to turnaround a software company than a hardware company, given the head-start by AWS (AMZN), Azure (MSFT) and even Google Cloud (GOOG) (GOOGL), I can't help but think it will take more time for Oracle to make a market share dent in the cloud, even with its formidable installed base.
We could see further margin gains Wednesday night, as it appears the software giant is focusing on operating expenses to help the operating margins.
Given the run in the stock and optimism around the Oracle cloud effort, it seems like expectations are quite high coming into Wednesday night's earnings release.
Short term, the expectations and bullishness around Oracle mean I wouldn't be a buyer in front of the quarter.
Longer term, the share repurchases and the margin gains are helping support the stock as the management team works through the cloud obstacles. Larry Ellison said on the December '20 conference call that Oracle Cloud OCI (Oracle Cloud Infrastructure) fell short of demand.
Writing this earnings preview of Oracle on December 20th, 2020, I was turning more bullish on the stock, but did not expect the sentiment to turn so quickly positive. However, as momentum stocks have faded in 2021, "value" and quality have gotten a boost. That too has certainly helped Oracle.
Clients do not have a big position in the stock since it has run faster and further than I thought since December '20.
This article was written by
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