What Losing Conviction At Oracle Looks Like

In a report published Wednesday, Citi analyst Walter H Pritchard maintained a Neutral rating and price target of $42 on Oracle Corporation ORCL. "After lackluster 4Q15 results, we take a more detailed pass at some of the controversies around ORCL's numbers. We have mixed conclusions and therefore aren't able to get incremental conviction the current spate of investor concerns will be resolved soon," Pritchard elaborated. Following checks with Oracle's partners and based on the company's price list, the analyst believes that Oracle continues to offer aggressive incentives/discounts, the breakeven impact of which is uncertain for the license-cloud transition. The analyst also expects the SaaS/PaaS gross margins to decline further, stabilizing only later in FY16, when revenue catches up with the company's costs. "Street revenue estimates for SaaS / PaaS looks conservative for FY16 given FY15 reported new ARR and guidance for FY16," according to the Citi report. The analyst expects the stock valuation to be driven by four key levers, with the scale of license declines having the higher sensitivity to potential upside/downside. However, this is one area that continues to be uncertain. Another important lever for the stock is the maintenance renewal rate, which the analyst believes would continue to do well. In addition, the analyst mentioned that there was a lack of conviction regarding the Street concerns being alleviated through the end of CY2015. "While shares have underperformed, we note that numbers have come down while stock has retained P/E at high-end of trading history," Pritchard added.