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Oracle Corporation’s Future Is Getting Cloudy

Tom Taulli

Recently some Wall Street analysts — such as from UBS Group and RBC Capital Markets — have gotten more concerned about Oracle Corporation (NYSE:ORCL). The main issue has been the progress with the cloud.

And yes, these worries have borne out — at least for the latest quarter. On news of the results, ORCL stock fell over 5%. This means that the year-to-date return is about 23%. All in all, ORCL stock has underperformed various other top rivals like Microsoft Corporation (NASDAQ:MSFT) and SAP SE (ADR)(NYSE:SAP).

OK then, so let’s go into more detail on ORCL earnings. Revenues increased by 6.2% to $9.63 billion and adjusted earnings came to 70 cents a share. As for the consensus, it was for the top-line to come in at $9.567 billion and for the profits to hit 68 cents a share.

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While this was a decent performance, there were other details of the quarter that were not so encouraging. Just look at the cloud business. Keep in mind that ORCL expects that the revenue growth for the current quarter will be between 21% to 25%, compared to the consensus estimate of 30%. This was actually the second consecutive quarter of lower expectations.

Next, the overall revenues are likely to decelerate. ORCL is now projecting that the top line for the current quarter will range from 2% to 4%. However, the Street was looking for 4.3%.

Oracle did try to sugarcoat things (no doubt, the company is pretty good at this!). Here are some of the highlights:

-Cloud PaaS (Platform-as-a-Service) and IaaS (Infrastructure-as-a-Service) revenues jumped by 20% to $396 million.

-Cloud SaaS (Softwware-as-a-Service) rose by 47% to $1.1 billion.

But unfortunately, such metrics are really just noise. Wall Street wants to see a growth on a broader basis. And for the most part, it looks like ORCL is starting to suffer a deceleration. This is particularly troubling since the company is still in the early stages in its cloud efforts.


The Cloud and the Oracle Stock Price

The cloud opportunity is not just about growth. If anything, for ORCL stock, this technology trend could pose a long-term threat to the core database business, which throws off substantial cash flows.

Top cloud operators like Amazon.com, Inc. (NASDAQ:AMZN) and MSFT have been leveraging their cloud platforms to move more aggressively into the database segment. For example, MSFT has been getting traction with Azure SQL and AMZN has been launching innovative offerings like Neptune and Aurora Serverless. Oh, and these companies are also at the leading edge of AI (Artificial Intelligence), which is likely to boost the power of databases.

In the meantime, there are a variety of innovative startups that are attacking the database market. The recent successful IPO of Mongodb Inc (NASDAQ:MDB) shows that investors see the potential for disruption.

Bottom Line On ORCL Stock

During ORCL’s 40-year history, Larry Ellison has been able to effectively adapt to the changing dynamics of the technology world. He has shown a great ability to innovate the products and engage in bold M&A. The result is that the value of ORCL stock is a massive $197 billion.

But as for the cloud, he has been very late — which has meant playing a grueling game of catch-up. Now, this is not to say it is hopeless. ORCL has tremendous resources to make acquisitions as well as pump up R&D.

Although, it does seem reasonable that the transition will take a while and be choppy, which is already evident in the latest earnings report. And this will probably mean that ORCL stock could tread water for some time.

Besides, the valuation is not cheap either. Note that the price-to-earnings ratio is currently 21X ORCL stock. In other words, it’s probably a good idea to hold off on the shares.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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