Oracle Corporation (ORCL) Is Taking a 4% Dip on FQ2:18 Cloud Growth Outlook; These Analysts Offer a Bullish Take

One top analyst raises price target on Oracle; another analyst believes the worst is now over for the giant.

Oracle Corporation (NYSE:ORCL) shares are dipping 4% after the software giant maybe yielded an outclass on lofty expectations for the first fiscal quarter of 2018- but ultimately stumbled on faltering outlook for the second fiscal quarter. When it comes to guidance, cloud growth prospects came in shaky, and investors did not find the strength in Oracle’s earnings enough to balance the underwhelming future ahead. Yet, despite some shareholder apprehension at play, two voices on Wall Street are weighing in making a bullish cake for the giant.

Top analyst Richard Davis at Canaccord not only is not fazed by the pullback, but has become even more confident that this giant makes for a compelling investment opportunity, maintaining a Buy rating on ORCL stock while bumping up the price target from $56 to $57, which represents a just under 13% increase from current levels.

For the first fiscal quarter of 2018, the software giant posted $9.2 billion in non-GAAP revenues, a 6% rise in constant currency and an outclass singing at $200 million beyond the analyst’s forecast. Non-GAAP EPS generated $0.62 for the quarter, marking an 11% year-over-year climb in constant currency, “nicely ahead” of the analyst’s projection of $0.60, with non-GAAP operating margins of 41.1% mostly aligning with expectations. Total cloud revenue hit a 51% year-over-year rise to $1,492 million, beating Davis’ estimate angling for $1,475 million, now comprising of 16.2% of Oracle’s total revenue- a hike from this time last year’s 11.4%. TTM operating cash flow has arrived at $14.8 billion, a step up of 8% year-over-year.

Davis notes, “Oracle posted its third consecutive positive surprise, as most of the key metrics came in at least a bit better than expected. The cloud growth guidance, even adjusting for currency, was a bit less than some hoped, so the stock traded off about 4% after hours. Our view remains unchanged, which is that Oracle is a logical and relatively safer port in a storm that some fear will arrive. The stock will likely outperform in down or choppy markets and underperform in a strong tape. We believe ORCL is sufficiently inexpensive that it should remain a BUY.”

For the second fiscal quarter of 2018, tweaking ORCL’s management’s outlook for currency, the analyst finds the second fiscal quarter ranges to be set between 42% and 46% cloud growth, 4% and 7% total revenue growth, and $0.66 and $0.70 for non-GAAP EPS, juxtaposed against the analyst’s expectations of 47% cloud growth, 5% total revenue growth, and $0.67 in EPS. These are still “pretty solid,” Graham says, even withstanding the slightly sluggish cloud growth that underwhelmed expectations.

True, “Outlook: a bit light on cloud growth, but solid earnings,” explains the analyst, who notes that for the fourth quarter in a row, the company’s SaaS revenue soared “north” of 60%, all with segment gross margins stepping up from 59% to this time last year’s 59%. In fact, the Oracle team anticipates SaaS gross margins might even experience 80% growth by the close of fiscal 2019, with chatter pointing to cloud bookings seeing a more robust performance in the second fiscal quarter than growth rates in the first fiscal quarter. Additionally, “non-GAAP operating income grew double digits for the first time in years,” cheers Davis, who looks ahead to the October introduction of Oracle’s self-tuning cloud service at OpenWorld.

However, the analyst acknowledges some “bearish items” that ran amiss, including that troubling second fiscal quarter cloud growth outlook set between 39% to 43% in constant currency, underperforming his expectations calling for 47%. However, even with an upfront investment in the company’s PaaS/IaaS segment that has “driven pretty steady degradation in segment gross margins,” declining from last year’s 58% to 44%, the analyst ventures: “this should improve materially as revenues scale; […] we’d suggest that double-digit operating income growth this year should push the stock higher at least on pace with that growth.”

Richard Davis has a very good TipRanks score with a 78% success rate and a high ranking of #2 out 4,642 analysts. Davis garners 27.4% in his annual returns. When recommending ORCL, Davis realizes 13.9% in average profits on the stock.

Drexel Hamilton analyst Brian White also approaches Oracle from a bullish perspective, finding it impressive that Oracle managed to score “upside in the seasonally weakest sales quarter,” beating both his first fiscal quarter for 2018 expectations on sales and EPS, as well as the Street’s. This is a company that “morphs into a self-driving cloud machine,” and “we would be buyers of Oracle on any weakness this morning,” White asserts.

In reaction, the analyst reiterates a Buy rating on shares of ORCL with a $62 price target, which implies a close to 23% increase from where the stock is currently trading. (To watch White’s track record, click here)

“With 1Q:FY18 now reported, Oracle is out of the seasonally weakest sales quarter of the year and Oracle OpenWorld (10/1-5) is on the horizon with a Financial Analyst Meeting on October 5. Over three years ago, Oracle began pushing aggressively into the cloud, negatively impacting sales and EPS along the way; however, we believe the worst of this transition is over,” highlights White.

As far as White is concerned, Oracle is in great standing here: “Oracle’s progress in the cloud over the past 3-4 years has defied all the skeptics and the company has built a formidable cloud franchise. Non-GAAP 1Q:FY18 cloud revenue (i.e., SaaS and PaaS/IaaS) reached $1.49 billion (up 51% YoY in CC) and approached our $1.50 billion forecast. SaaS revenue came in at $1.09 billion (up 61% in CC) in 1Q:FY18 and beat our estimate of $1.07 billion, while PaaS/IaaS at $403 million (up 28% in CC) came in below our $431 million forecast.”

Oracle’s revenue outperformed the analyst’s expectations that aligned with consensus at $9.03 billion, with pro forma EPS of $0.62 topping his EPS forecast of $0.61 as well as the Street’s $0.60.

What’s the word on the Street when it comes to the software giant? The verdict points to the bulls, as TipRanks analytics exhibit ORCL as a Strong Buy. Out of 26 analysts polled by TipRanks in the last 3 months, 21 are bullish on Oracle stock while 5 remain sidelined. With a return potential of 7%, the stock’s consensus target price stands at $56.54.

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