Oracle has been one of 2021’s best-performing tech stocks, up nearly 30% so far this year. What’s driving the shares is, of course, investors.
There are investors who are turning away from high-growth cloud stocks that posted huge gains in 2020 and to stocks expected to benefit from a pick-up in corporate technology spending. And there are investors who are enthusiastic about Oracle’s big push to shift more of its business to the cloud. And there could be investors who fall into both categories.
The rally will add extra interest to
fiscal fourth-quarter earnings report, which is due on Tuesday after the close. For the quarter, which ended May 31, Oracle has projected sales growth of 5% to 7%, or 1% to 3% in constant currency. Street consensus calls for revenue of $11.04 billion, up 5.8%. That would be the company’s best growth quarter in three years; if sales growth can hit 7%, it would be Oracle’s higher growth rate in a decade. Oracle’s guidance calls for profits of $1.28 to $1.32 a share; the Street consensus view is $1.31.
For the fiscal first quarter ended August 31, which is always seasonally slower than the fiscal year-end May quarter, the Street sees revenue of $9.68 billion and profits of $1.03 a share.
Oracle is pushing to transform its business for the cloud era, as Barron’s has reported. The company has built a public cloud business, Oracle Cloud Infrastructure, to compete with
(MSFT), and Alphabet (GOOGL). It is seeing smart growth for Autonomous Database, a cloud-based version of its flagship relational database software, and solid demand for cloud-based enterprise applications, in particular Fusion ERP, financial software for large companies.
When Oracle reported February quarter results, the stock sold off, with revenue growth of 3% right in line with guidance. The pressure on the shares came despite a $20 billion expansion of the company’s stock repurchase program and a 33% dividend hike. The initial concern was that the company’s cloud transformation is taking longer than some investors would like—and the stock sold off 6.5% the day after earnings. But the concerns were passing: Shares have rallied more than 23% since then. Last week, the stock set a new all-time high at $85.03 a share. Oracle was a Barron’s stock pick in February.
Analysts worry that the rally makes the stock vulnerable here—-and caution that further gains will require Oracle to demonstrate accelerating traction in its cloud transformation.
Citi analyst Tyler Radke has a Neutral rating and $69 target price. He expects the quarter to be in line with guidance, which he doubts would be enough to drive further gains. He sees the company benefiting from an easy comparison, improving economic trends and “growth in pockets of cloud,” offset by “growth challenges” in database software and declining maintenance revenue.
“With the significant run in the stock … it’s hard to see how the stock can re-rate further from here, unless we see more of a significant top-line beat, which looks less likely,” Radke writes.
Cowen analyst J. Derrick Wood maintains his Outperform rating and $85 target price, but likewise cautions that the rally has complicated matters.
“Our checks are constructive around strength in cloud bookings and we’re expecting a solid quarter,” he writes. “But the bar is lifted as the stock has delivered one of the strongest 3-month performances we’ve seen in a decade.”
Wood thinks the rally most reflects a sector rotation from growth to value but adds that a strong fourth quarter and accelerating revenue in fiscal 2022 “should help support this directional trend.”
Write to Eric J. Savitz at firstname.lastname@example.org