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Global Barometer: Oracle Earnings Could Provide Insight On Economy

JJ Kinahan

Anyone seeking insight into the global economic picture might want to pay attention Thursday after the U.S. closing bell when computer technology corporation Oracle Corporation (NYSE: ORCL) delivers its fiscal Q3 earnings. 

A big thing to consider looking for from ORCL is the company’s statement. We’re seeing worldwide economic growth slowing, and when it comes to “worldwide,” ORCL is probably as big as it gets. The question is what their projections might look like. Do they see slowing in Asia? Do they see continued weakness in Europe? The company is arguably a great barometer of how the world economy is doing.

As of mid-March, ORCL shares were up 14% year to date, compared with about an 11% rise for the S&P 500 Index (SPX). In the past 52 weeks, the stock has been roughly flat. 

ORCL is expected to report earnings per share of $0.84, from $0.83 in the prior-year period, on revenue of $9.6 billion, according to third-party consensus analyst estimates. Revenue is projected to be down about 2% year over year.

In fiscal Q2, ORCL’s earnings of $0.80 per share came in at the high end of the company’s forecasts and exceeded the average analyst estimate of $0.78 per share. Shares jumped 5% immediately after the company reported.

Stock Performance Outpacing Overall Market in 2019

ORCL shares have really been on a roll so far this year, and are up 25% from the holiday lows that coincided with the rest of the market hitting its lows for 2018.

Oracle has a major cloud presence, so investors might want to listen closely to get a sense of how that’s performed since December. Oracle’s two cloud ERP businesses, Fusion ERP and NetSuite ERP, delivered a combined revenue growth rate of 32% in fiscal Q2, the company said. However, ORCL faces intense competition as other players shift to cloud computing. Just this week, Nvidia Corporation (NASDAQ: NVDA) announced the purchase of Mellanox Technologies, Ltd. (NASDAQ: MLNX), a maker of Ethernet switches and adapters that connect computers to each other. This is a move analysts said could give NVDA, a chipmaker, a foothold in the cloud space.

Competition is likely to keep increasing, but ORCL has a head start in some ways because of its huge sales and distribution network. It’s a very mature company.

Software as a Service (SaaS)—which allows users to subscribe and use application software in the cloud—is an area where ORCL has a heavy presence. One reason the stock might be doing so well is that within 10 years analysts expect the overall SaaS business (for ORCL and competitors) to grow six-fold. It’s a high-margin business already, and many analysts expect those margins to increase.

Also, the hardware business is still 10% of ORCL’s revenues. While some analysts note that hardware might weigh on ORCL’s operating margins, companies like Apple Inc (NASDAQ: AAPL) have shown that hardware can be a robust business area. There’s still a place for it, but companies like ORCL have to allocate resources smartly.

As ORCL prepared to report, it received a downgrade on Monday from Nomura Instinet, which reduced its price target and expressed concern about the company’s buyback program, MarketWatch reported. The analyst said ORCL’s buybacks could be causing it to underinvest in research and development and might limit its ability to engineer any major merger and acquisition (M&A) activity.

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Strong Start: Oracle shares (candlestick) are off to a fast start in 2019, as this year-to-date chart shows. They’re roughly keeping pace with the S&P 500 Index (purple line). Data source: S&P Dow Jones Indices. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Oracle Options Activity

For ORCL, the options market has priced in an expected share price move of about 4.2% ($2.23) in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 53.50 and 55 strikes while put activity has concentrated at the 52.50 and 50 strikes. The implied volatility sits at the 39th percentile as of Thursday morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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