Oracle Sees Opportunity in the Cloud

09/19/2017 2:59 am EST


Chris Quigley

Contributing Editor, The Prudent Speculator

Strong performance from the Cloud segment propelled Oracle (ORCL) to an outstanding fiscal Q1 2018. The software giant reported earnings per share of $0.62, versus the $0.60 estimate for the period, observes Chris Quigley, contributing editor of The Prudent Speculator.

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ORCL had sales of $9.2 billion, compared to the $9.0 billion estimate. Total cloud and software revenue were up 8% year-over-year on a constant currency basis to $7.4 billion. ORCL also reported a 10% year-over-year increase in operating income to $3.8 billion with a 41% operating margin.

Although the stock initially rallied on the news as fiscal Q1 results beat expectations, somewhat soft guidance for the upcoming quarter sent shares tumbling more than 7%.


Co-CEO Mark Hurd said, “A couple of predictions, I expect Q2 cloud booking growth to be strong or stronger than our Q1 growth rate. Our cloud bookings, we're executing well on a very big and growing pipeline. We expect the cloud FY 2018 full-year cloud booking growth to be quite strong. Revenue growth now at an annualized rate of $6 billion, or a growth rate of 51%, and we are the fastest growing cloud company at scale.

We remain encouraged by the substantial momentum gains in the cloud business and we continue to believe that ORCL has a quality leadership team that will drive top-line growth to the bottom line.

We think that the sell-off creates an opportunity to purchase an undervalued IT firm with solid fundamentals, a substantial net cash position and strong free cash flow generation.

With shares having retreated from the multi-year highs, we think that the forward P/E ratio of 16.2 times remains on the reasonable end of the spectrum. We actually chose to raise our Target Price of $60. ORCL currently yields 1.6%.

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