Is Oracle (ORCL) Worth Buying on the Post-Earnings Dip?

Shares of Oracle ORCL dropped more than 9% in morning trading Tuesday after the company reported its latest quarterly financial results yesterday afternoon. The software giant’s new figures were mixed, and investors clearly felt unsatisfied. But is this a post-earnings overreaction? Is now a great time to buy ORCL on the dip? Let’s take a closer look.

Latest Results

For the third quarter of fiscal 2018, Oracle witnessed adjusted earnings per share of $0.83, beating the Zacks Consensus Estimate of $0.72. Meanwhile, the company saw revenue figures of $9.77 billion, coming in just below our consensus estimate of $9.79 billion.

Total revenues were up 6%. Segment wise, Cloud and On-Premise Software Revenues climbed 8%, while Cloud Software as a Service revenues soared 33%.

In Oracle’s earnings conference call, CEO Safra Catz told analysts that the firm expects to report adjusted earnings of $0.92 to $0.95 per share and revenue growth of 1% to 3% for the fourth quarter. Heading into the report data, our Zacks Consensus Estimates were calling for earnings of $0.90 per share and revenue growth of 2.6%.

But the real concern for investors is Oracle’s slowing cloud growth. Management guided for total cloud revenues to improve between 19% and 23% in Q4, which is sluggish compared to the 32% growth it saw this quarter—and even worse considering the 51% and 44% rates it witnessed in Q1 and Q2.

Possible Problems

One potentially troubling outcome related to Oracle’s slowing cloud growth is that the firm will be swallowed up by competitors. Oracle is decreasing its dependency on software sales for corporate datacenters, but on-premises revenues still accounted for 66% of total revenue in the latest quarter. Meanwhile, cloud platform as a service and cloud infrastructure as a service generated about $415 million in sales, up just 28% year over year.

Compared to the market-leading cloud infrastructure service from Amazon (AMZN), Amazon Web Services, Oracle looks tiny. In the most recent quarter, AWS saw revenue growth of 45% to touch $5.11 billion.

Lackluster Momentum

Oracle’s inability to stick out from the rest of the tech crowd also reflects itself in its stock’s lack of momentum. With Tuesday’s losses factored in, ORCL is up just 3% over the last year, which looks especially lackluster in the face of what has been an incredible run for the rest of the tech sector—especially Oracle’s large-cap competitors.

Value Play?

Based on Monday’s closing price, Oracle was trading at just 17x forward 12-month earnings, marking a discount to its industry’s average. Tuesday’s 9% slump will drag the stock even further into value territory. However, ORCL has been a rollercoaster ride over the past 52 weeks, and it likely won’t see the steady and volatility-free returns that value investors prefer.

Bottom Line

Oracle is currently sporting a Zacks Rank #3 (Hold), but that could change if analysts revise their estimates to match the company’s slightly more upbeat earnings guidance. Improved analyst sentiment might kick start the stock after its post-earnings selloff, so investors should keep their eyes on that as a potential bullish indicator.

Nevertheless, ORCL has proven to be an up-and-down stock recently, and with legitimate concerns lingering about its ability to compete in a crowded cloud computing landscape, some investors may want to stay away.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Oracle Corporation (ORCL) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research