Vtrade Proposes to Sell Oracle Corporation (NYSE: ORCL)

Oracle Corporation

NYSE: ORCL

COMPANY DESCRIPTION

Founded in –1977 | Current Market Cap – 188.63 Billion USD

Oracle Corporation develops, manufactures, markets, sells, hosts, and supports application, platform, and infrastructure solutions for information technology (IT) environments worldwide. The company provides services in three primary layers of the cloud: Software as a Service, Platform as a Service, and Infrastructure as a Service. It offers human capital and talent management, enterprise resource planning, customer experience and relationship management, procurement, supply chain management, project portfolio management, business analytics and enterprise performance management, and industry-specific application software, as well as financial management and governance, and risk and compliance applications. The company also licenses its Oracle Database for storage, retrieval, and manipulation of data; and Oracle Fusion Middleware software to build, deploy, secure, access, extend, and integrate business applications, as well as automate business processes. Oracle Corporation headquartered in Redwood City, California.

RECOMMENDATION

We rate Oracle Corp. a Sell at USD 52.56 for a target of USD 44.35 in one months.

Below are the basic reasons to recommend this stock as a Sell.

·         Although Oracle’s growing cloud business is a significant positive, we believe that the business model transition will hurt revenue growth over the next couple of years. The company expects to gain a significant part of its revenues from SaaS compared with legacy on-premise licensing business. However, SaaS revenues will not be recognized upfront as in the case of license business, which will hurt top-line growth in the near term. Moreover, although engineered systems are expected to drive growth, we believe that lower hardware volumes will continue to hurt top-line growth over the next couple of years. Moreover, hardware is significantly lower margin business that will keep margins under pressure, going forward.

·         Acquisitions have played an important part in Oracle’s growth trajectory over the years. Being a late entrant in the cloud computing space, the company is trying to build its position through aggressive acquisitions. The company is making significant investment in these acquisitions in order to catch up with AWS, Salesforce and IBM. As the SaaS market is getting overcrowded, we believe that all acquisitions may not perform as per company expectations, which will eventually hurt profitability. Moreover, large acquisitions can negatively impact the company’s balance sheet in the form of a high level of goodwill and intangible assets.

·         Oracle faces significant competition in most of its operational markets (database, applications, storage, cloud computing) from the likes of Dell-EMC, IBM, Hewlett-Packard, Microsoft, Sybase, SAP, Salesforce.com, Workday and Teradata. The trend toward consolidation is increasing competition for the company in most of these markets. To differentiate products here, large vendors are entering into alliances or partnerships to offer integrated and differentiating solutions. As a result, Oracle continues to face severe pricing pressure and lengthy sales cycles in its core business, which is hurting profitability. Moreover, stiff competition in the cloud is expected to hurt margins and will make revenue growth difficult to come by over the long run.

·         Oracle has been embroiled in various legal tangles. In 2016, Oracle faced defeat in two of its most high-profile lawsuits. In May 2016, a 10-member jury found no violations of JAVA APIs by Alphabet thus dismissing Oracle’s $9 billion claim. Moreover, a California Court held Oracle liable of paying Hewlett Packard Enterprise $3 billion in damages for withdrawing support to itanium software. The company is hell bent on re-appealing against these verdicts. In December 2017, the company renewed the legal fight over Android against Alphabet. In the recent filing Oracle challenged the idea of “fair use,” and alleged that Google lied when it said Android didn’t compete directly with Oracle’s ability to license its own products to customers. We believe such high legal risks, if materialized, might wreak havoc on the company’s financials.

EARNINGS

Oracle Corporation reported modest second-quarter fiscal 2019 results. Non-GAAP earnings of 80 cents per share surpassed the Consensus Estimate of 78 cents. Revenues of $9.562 billion were almost in line with the Consensus Estimate of $9.535 billion.

Earnings increased approximately 16% from the year-ago quarter (up 19% in cc). Further, revenues were almost flat year over year and increased 2% in cc. This was towards the higher range of management’s guidance of 0-2%.

BALANCE SHEET & CASH FLOW

As of Nov 30, 2018, Oracle had cash & cash equivalents and marketable securities of $49.39 billion, down from $60.1 billion sequentially. Operating cash flow for the trailing four quarters was $15.2 billion, while free cash flow was $13.8 billion.

Disclaimer:

Views are strictly personal. This Interim Financial Results & News posts or updates includes forecasts, projections and other predictive statements that represent Vtrade's assumptions and expectations in light of currently available information. These forecasts, etc., are based on industry trends, circumstances involving companies and other factors, and they involve risks, variables and uncertainties. The Group’s actual performance results may differ from those projected in these Interim Financial Results. Consequently, no guarantee is presented or implied as to the accuracy of specific forecasts, projections or predictive statements contained herein.