Oracle Corporation (ORCL) Continues Transition to Cloud; Analysts Divided Over Entry Point

Oracle Corporation (NYSE:ORCL) announced fiscal fourth quarter 2015 earnings on June 17. Analysts were optimistic about growth in Oracle’s cloud computing segment as the company transitions away from traditional software. However, Oracle still missed estimates on both revenue and earnings per share.

Oracle posted quarterly revenue of $10.72 billion compared to the analyst consensus of $10.96 billion. This marks a 5% year-over-year decrease, but Oracle notes this would have been a 3% increase disregarding the recent strength of the U.S. dollar. Because Oracle is based in the United States but does a lot of business internationally, a strong U.S. dollar had a strong adverse effect on sales. The company posted non-GAAP earnings per share of $0.78, missing the analyst consensus of $0.87. Aside from earnings, Oracle announced a quarterly cash dividend of $0.15 to be paid in late July to stockholders as of July 8.

Despite the misses, Oracle executives focused on the impressive growth in cloud computing. Analysts expected Oracle to post $300 million in revenue from the cloud segment, but Oracle blew estimates out of the water and posted cloud revenue of $416 million. This marks a 28% year-over-year increase, or a 34% year-over-year increase barring currency fluctuations.

In the earnings call with investors, Oracle CEO Safta Catz explained the value of cloud bookings: “While we believe our over-achievement in cloud bookings will be much more valuable in both revenue and earnings over time, cloud revenue is recognized ratably unlike new license which is recognized upfront. This shift has the effect of lowering near term earnings per share but over time will increase it significantly.”

Analysts remain divided over recommending to Buy or Hold Oracle.

On June 18, Goldman Sachs analyst Heather Bellini reiterated a Buy rating on Oracle with a $48 price target. She commented, “We expect ORCL’s license results to continue to be pressured on a [year-over-year] basis. However our field checks also confirm that the company’s competitiveness in the cloud has improved considerably over the last 12-18 months.” She raised her estimates for Oracle’s primary cloud segments from $1.85 billion to $2.375 billion. On the other hand, she lowered her total software and cloud revenue estimate from $29.62 billion to $29.31 billion.

Heather Bellini has a 67% success rate recommending stocks with a +16.7% average return per rating.

Separately on June 18, Jefferies analyst John Difucci maintained a Hold rating on Oracle with a $41 price target. Difucci noted, “ORCL reported F4Q results that were light of estimates and guidance, even if consensus numbers were a bit high relative to cc guidance.” He explained, “License was the only revenue line item that was meaningfully below estimates, though management attributed this to the strength in Cloud bookings, which are recognized as revenue over time, versus the upfront recognition of license. EPS was also below estimates.”

John Difucci has a 51% overall success rate recommending stocks with a +0.3% average return per rating.

Out of the 13 top analysts polled by TipRanks, seven analysts are bullish on Oracle and six analysts are neutral. The average 12-month price target for Oracle is $46.40, marking nearly a 12% potential upside from where the stock is currently trading. On average, the top analyst consensus for Oracle is Moderate Buy.

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