Why Pacific Crest Just Downgraded Oracle Stock

• Oracle Corporation ORCL shares have plummeted 9 percent from a high of above $40 on July 20.
• Pacific Crest’s Brendan Barnicle downgraded the rating on the company to Sector Weight.
• A transition year has begun for the company, and there could be increased volatility in its model as it moves to the cloud, Barnicle said.

Analyst Brendan Barnicle mentioned that Oracle’s accelerated move to the cloud could result in increased volatility in its model and adversely impact F2016 revenues. Although SaaS/PaaS contribute less than 10 percent of Oracle's revenues, they would replace some new license and maintenance revenue.

Barnicle explained, “SaaS/PaaS revenue recognition is extended over a longer time than perpetual licenses, creating a headwind to growth and masking Oracle's true growth rate.”

Other software vendors that have transitioned to the cloud have typically faced challenges during the transition, especially if they shifted only a portion of the business to the cloud, Barnicle said, while adding, “Oracle is likely to face these same challenges.”

The revenue estimate for F2016 has been reduced from $38.0 billion to $37.2 billion, mostly to reflect reductions to our new license assumptions. “We also assume 6% FX headwind for the year,” the analyst stated.

The EPS estimates for F2016 and F2017 have been reduced from $2.70 to $2.56 and from $3.09 to $2.86, respectively.

In the report Pacific Crest noted, “While we believe the move to the cloud is the right move long term, we are lowering estimates and are downgrading to Sector Weight during this transition.”