Despite a lower-than-expected fourth-quarter performance, the shares of Oracle Corp. (ORCL) gained as the company provided upbeat guidance for the current quarter. In this article, we will evaluate if it's the right time to invest in the stock now. Continue reading…

Oracle Corporation (ORCL), the software giant, unveiled its fiscal fourth-quarter and full-year earnings yesterday, on June 11, 2024, falling short of consensus revenue and EPS estimates. In this piece, I have discussed why it could be wise to wait for a better entry point in the stock now.

In the fourth quarter ending May 31, 2024, ORCL reported a 3.3% year-over-year increase in total revenues, reaching $14.29 billion, which was below Wall Street's expectation of $14.57 billion. The cloud services and license support segment revenue amounted to $10.23 billion (up 9% year-over-year), while the cloud and on-premises licenses business contributed $1.84 billion in revenue.

Its non-GAAP operating income grew 8.3% from the year-ago value to $6.67 billion, and its net income (on a non-GAAP basis) came in at $4.61 billion, slightly below the $4.66 billion reported in the prior year’s quarter. The company reported non-GAAP earnings per share of $1.63, down 2.4% year-over-year, missing analysts' expectations of $1.65.

However, its free cash flow amounted to $11.81 billion, reflecting a 39.4% improvement from the same period last year. Additionally, ORCL’s cash and cash equivalents increased to $10.45 billion as of May 31, 2024, compared to the year-ago value of $9.77 billion.

Thanks to strong cash flows, ORCL's Board of Directors declared a quarterly dividend of $0.40 per share of outstanding common stock, payable on July 25, 2024. The company pays an annual dividend of $1.60 per share, translating to a 1.29% yield on the current share price. Its four-year dividend yield is 1.49%. Over the past three and five years, ORCL’s dividend payouts have grown at CAGRs of 15.4% and 14.6%, respectively.

During the last two quarters, Oracle achieved its largest sales contracts to date, driven by a surge in demand for AI large language model training on the Oracle Cloud. CEO Safra Catz said, “These record-breaking sales resulted in a 44% increase in our remaining performance obligations (RPO), reaching $98 billion.”

She projected that the strong demand for AI would continue to propel ORCL's sales and RPO higher throughout the fiscal year 2025, contributing to double-digit revenue growth and accelerating quarterly performance as Oracle Cloud Infrastructure (OCI) capacity expands to meet the demand.

Notably, in the fourth quarter alone, the company secured more than 30 AI-related sales agreements worth over $12.5 billion, including a significant contract with OpenAI to train ChatGPT on Oracle Cloud.

Looking ahead, Oracle projects fiscal first-quarter earnings to range between $1.31 and $1.35 per share, with expected revenue growth of 5% to 7%. This optimistic outlook appears to mitigate concerns over the recent earnings miss.

In terms of price performance, the software marketer's shares have gained 17.5% year-to-date and 12.8% over the past year, closing the last trading session at $123.88.

Here are the fundamental aspects of ORCL that could influence its performance in the near term:

Favorable Analyst Estimates

Analysts expect ORCL’s EPS for the first quarter (ending August 2024) to increase 10.9% year-over-year to $1.32. Its revenue for the current quarter is projected to be $13.39 billion, indicating an increase of 7.5% from the prior-year period. It is no surprise that the company has surpassed the EPS estimates in each of the trailing four quarters.

For the fiscal year ending May 2025, ORCL’s revenue is expected to increase 8.4% year-over-year to $57.76 billion. The company is estimated to post earnings per share of $6.23 in the current year, indicating an 11.5% growth from the prior year period.

Robust Profitability

ORCL’s 71.53% trailing-12-month gross profit margin is 43.8% higher than the 49.73% industry average. The stock’s 23.01% trailing-12-month levered FCF margin is 126.6% higher than the 10.15% industry average.

Similarly, its trailing-12-month EBIT and net income margins of 29.15% and 20.27% are substantially higher than the industry averages of 4.72% and 2.67%, respectively. Furthermore, ORCL’s trailing-12-month ROCE of 664.71% compares favorably to the industry average of 3.90%.

Mixed Valuation

In terms of forward non-GAAP P/E, ORCL is trading at 22.28x, 6.1% lower than the industry average of 23.73x. Likewise, the stock’s forward EV/EBIT and forward Price/Cash Flow of 18.30x and 18.14x are 11.9% and 22.6% lower than the industry average of 20.77x and 23.43x, respectively.

On the other hand, ORCL’s forward EV/EBITDA of 16.37x is 11.3% higher than the 14.71x industry average. Also, its forward EV/Sales multiple of 7.90 compares to the industry average of 2.93.

POWR Ratings Exhibit Mixed Prospects

ORCL’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ORCL’s C grade for Growth and Value is justified by its slightly lower-than-expected latest quarterly results and mixed valuation.

Yet, the stock received a B for Quality, corresponding with its robust profitability.

ORCL is ranked #48 out of 135 stocks in the Software - Application industry. Click here to access ORCL’s Momentum, Stability, and Sentiment ratings.

Bottom Line

While there is optimism surrounding ORCL’s potential to capitalize on the upcoming forecasts, especially with its strategic partnerships and anticipated growth in cloud services, the current dip in earnings and revenue is a cause of concern. Additionally, given the stock’s mixed valuation, waiting for a better entry point into the stock could be beneficial.

How Does Oracle Corporation (ORCL) Stack Up Against Its Peers?

While ORCL has an overall grade of C, equating to a Neutral rating, you may check out these A (Strong Buy) rated stocks within the Software - Application industry: Yalla Group Limited (YALA), SS&C Technologies Holdings, Inc. (SSNC), and Commvault Systems, Inc. (CVLT). To explore more Software - Application stocks, click here.

What To Do Next?

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ORCL shares were trading at $140.06 per share on Wednesday afternoon, up $16.18 (+13.06%). Year-to-date, ORCL has gained 33.79%, versus a 14.31% rise in the benchmark S&P 500 index during the same period.

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About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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