Canaccord: 'Buy the Dip' in Oracle

Canaccord Genuity Analyst Richard Davis said in a new research note that the 10 percent decline in Oracle Corporation ORCL since its earnings report is an opportunity for investors to "buy the dip." Davis attributed the sell-off to lower-than-expected revenue growth – which was also depressed by currency headwinds – as well as a pure earnings shortfall. But, looking into the numbers, Davis said that the miss was attributed to a positive trend: "the firm's transition to the cloud is happening faster than expected." That leads Oracle to capture deferred earnings instead of up-front licenses.

Over the long term, Canaccord said that it "could not stress enough" that the cloud business is two or three-times more profitable to the company. Davis argued that Oracle will "realize a several-point multiple expansion." Currently, the company trades at 12x 2017 free cash flow.

Though Davis reaffirmed his view, he did lower earnings expectations for the firm. Canaccord's Q1 2016 EPS expectation dipped $0.02 to $0.52, while the FY2016 and FY2017 estimates were trimmed by $0.05 and $0.03, respectively. Davis noted that the analysis includes "conservative" expectations for deferred revenue growth, which could lead to a higher FCF valuation.

Over the 12 to 18 months, the firm believes that Oracle will reach a $50 price target, compared with current price near $40.20 – 24 percent upside. Year to date, the company has lost 10.5 percent in value, most all of which has come since the mid-June earnings report. Over the past 52 weeks, Oracle has traded between $35.82 and $46.71.