Oracle's Underperformance Likely To Subside, Leading JPMorgan To Upgrade Stock

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The underperformance in Oracle Corporation ORCL shares is likely to subside amid easy comps, JPMorgan's Mark Murphy said while upgrading the stock to Neutral from Underweight.

Oracle shares have underperformed the S&P 500 by 1,320 basis points in the last 18 months (-11.1 percent total return vs. +2.1 percent for the S&P500).

Justification

JPMorgan's upgrade is based on three factors:

    1. "First, sentiment has turned very negative in our view, as optimism for the Fusion applications product cycle and 12C database cycle has been erased and competitive concerns relating to Amazon.com, Inc. AMZN and Microsoft Corporation MSFT have moved to the forefront."
    2. Second, "Oracle currently enjoys a period of very easy revenue and earnings comparisons, at a time when the material FX headwinds of FY16 seem to be abating." Murphy, however, acknowledged that the recent Brexit event carries certain risks and is "material enough for us to recalibrate our estimates."
    3. "Third, consensus forecasts have dropped to a point that they are now below our assumptions in certain areas (although not all areas) even as the FX headwind of last year has transitioned into a small tailwind."

Related Link: Citi: Oracle's Earnings Stabilizing, Yet Prefers SAP On Lower Cloud Risk

However, Murphy cut his FY17 and FY18 projections. The analyst now forecast revenue of $38.3 billion and $2.81 EPS for FY17, and $39.9 billion revenue and $3.13 EPS for FY18. The current estimates are lower than the previous expectations of $38.9 billion revenue and $2.91 EPS for FY17, and $41.2 billion revenue and $3.34 EPS for FY18.

"We remain concerned about the future impact of Microsoft SQL Server on the Linux platform, but not until that product is released in 2H:CY17, and see ORCL shares trading inline with the peer group for the next 12 months against a backdrop of depressed sentiment, easy comps, and a low bar," Murphy highlighted.

Shares of Oracle closed Tuesday's regular trading session at $39.13 and were trading up 1.74 percent to $39.81 shortly after Wednesday's opening bell. The analyst has raised the price target by $1 to $38.

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Posted In: Analyst ColorLong IdeasUpgradesPrice TargetAnalyst RatingsTechTrading IdeasJPMorganMark Murphy
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