Don’t Expect A Bounce In Oracle (ORCL) Stock Any Time Soon
Markets are higher in mid-Friday afternoon trade, but one stock that is not is Oracle Corporation (NYSE:ORCL).
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The tech giant is down 7% after reporting solid first quarter numbers but delivering a sub-par guide for next quarter. The guide, which was announced on the earnings call, swung ORCL stock from an after-hours gainer to an after-hours loser.
Why? Investors are concerned that the Oracle Cloud growth story, which has been the major catalyst behind this stock’s 28% year-to-date gain, is slowing down much sooner than most expected. Fears that one-time deals are artificially inflating growth and that the cloud computing space is consolidating are now front and center.
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So ORCL stock is down big. The 7% decline makes it the worst day for ORCL stock in four years.
But is this an opportunity to buy the dip?
I’m not convinced it is. I think the best tactic with ORCL stock is still to wait and see.
Oracle Cloud Growth Is Slowing Too Much Too Soon
Recently, I put out an article saying that the biggest risk to ORCL stock is a rapid slowdown in its cloud-growth narrative.
The Oracle Cloud growth story has been on fire. Cloud Software-as-a-Service (SaaS) revenues rose 68% last year. Cloud Platform-as-a-Service (PaaS) plus Infrastructure-as-a-Service (IaaS) revenue grew 60% last year. Total Cloud revenues rose 60% in fiscal 2017.
That growth has been from a small base. The worry is that as the Oracle Cloud business scales, these growth rates will come down dramatically.
That is exactly what is happening. Total Cloud revenues only rose 51% in the first quarter of fiscal 2018. That growth is expected to slow down even further to roughly 43% in the second quarter.
Maybe the 60% to 50% to 40% growth rate slowdown is just the law of large numbers. After all, that is what happens when a hyper-growth business scales. Revenue growth comes down, margins go up, and everyone is happy.
Just look at Amazon.com, Inc (NASDAQ:AMZN), its Amazon Web Services business is following a similar trajectory in growth rate slowdown. AWS revenues are up 42% so far this year, versus 55% growth last year and 70% growth the year before that.
AWS, however, is also far, far bigger. AWS revenues were $4.1 billion last quarter. Total Cloud revenues at ORCL were just $1.5 billion last quarter.
Why is Oracle Cloud, which is about a third the size of AWS, experiencing the same revenue growth slowdown as AWS?
Meanwhile, over at Microsoft Corporation (NASDAQ:MSFT), Azure revenue growth really isn’t slowing down that much at all. Azure revenue growth has been trending in the 90% to 100%-plus range for several quarters now.
That is what the Oracle Cloud business should look like.
Bottom Line on ORCL Stock
The market isn’t dumb, and slower growth from Oracle Cloud is being treated as such. ORCL stock is pretty cheap, trading around 11.4-times fiscal 2018 earnings estimates after backing out the company’s $67 billion cash balance.
ORCL stock is up at multi-year highs despite mundane operational growth (GAAP earnings per share have gone from $2.26 in fiscal 2013 to $2.21 in fiscal 2017). That means ORCL stock is actually trading at a multi-year high valuation.
In other words, ORCL stock is cheap, but this is a stock that has always been cheap because growth has been more or less sideways. Granted, the cloud business is boosting the overall growth trajectory, but the stock is also a lot less cheap than it was just a year ago.
The next leg higher will come only if ORCL can prove that its cloud business has a long growth runway. They aren’t showing that right now.
Which is why I’m still on the sidelines with ORCL stock.
As of this writing, Luke Lango was long AMZN.
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