The Oracle Debate: Buy The Dip Or Abandon Ship?

Oracle Corporation (NYSE:ORCL) reported its fiscal third quarter results, which sent the stock lower by nearly 10 percent Tuesday. Investors appear to be concerned with the company's cloud performance and begs the question: should investors be buyers of the dip or not?

The Analysts

• Morgan Stanley's Keith Weiss maintains an Overweight rating on Oracle's stock with an unchanged $57 price target.
• Bank of America's Kash Rangan downgraded Oracle's stock from Buy to Neutral with a price target lowered from $62 to $57.
• Wedbush's Steve Koenig maintains an Outperform rating on Oracle's stock with an unchanged $55 price target.

Morgan Stanley: 60% Positive Report

The bullish case for owning Oracle's stock was based on a few areas of outperformance and the company confirmed three of these cases in its earnings report, Weiss said in a note.

License revenues of $1.39 billion in the quarter fell short of consensus estimates, but Oracle CEO Mark Hurd guided for growth in the database ecosystem.

A "lackluster" performance in the SaaS business was the most disappointing aspect of the earnings report and demonstrates "something is obviously not working here."

Oracle's non-GAAP tax rate for fiscal 2019 should come in at 19.5 percent versus the analyst's prior estimate of 24.5 percent. The company has the necessary access to cash to sustain the $4 billion share repurchase activity in the reported quarter.

Bank Of America: Long Term Thesis Unchanged

Oracle's long-term thesis remains favorable for two key reasons, Rangan said in a note.

• The company's BYOL (bring your own license) guarantees customers are more committed to Oracle's database so AWS' impact is "a rounding error."
• A more favorable mix continues to develop among partners in terms of adoption of Oracle Fusion Apps.

At the same time, Oracle's earnings shows that the pace of transition towards a cloud company isn't fast enough to maintain a bullish stance on the stock, the analyst said. Even though partner and customer sentiment is improving it will take longer for these improvements to be reflected in Oracle's numbers.

Wedbush: Attractive Valuation

Oracle's earnings and guidance were both "underwhelming" as the "strategically important" cloud revenue fell short of expectations, Koenig said in a note. The poor earnings report could be attributed to seasonality, a "lumpiness" in vertical applications and lagging performance from SaaS offerings the company acquired.

Nevertheless, Oracle's cloud business is growing although likely at a pace that's falling short of management's own ambitions, the analyst said. There's a "reasonable chance" year-end ELA activity will generate upside in Oracle's fiscal fourth quarter report and over the longer term the company could benefit from license sales and next-generation IaaS activity.

Oracle's stock looks "reasonably attractive," coupled with a double-digit EPS growth rate that should be sustainable. As such, investors are encouraged to "use weakness to accumulate" the stock.

At time of publication, the Oracle's stock was trading down 8.8 percent at $47.35.

Related Links:

Stifel Projects A Prolonged 'State Of Transition' For Oracle In Downgrade Report

Oracle's Cloud Transition Isn't Fast Enough, KeyBanc Says In Downgrade

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