Oracle – Old Tech and Value Tech and Chronic Underperformer – Reports Fiscal Q1 ’21 Earnings Tonight

Oracle Corp. (ORCL) the database software giant which has struggled to survive in the new cloud-driven world, reports their fiscal Q1, ’21 earnings tonight.

Per Street consensus, EPS is expected at $0.86, on $9.28 billion in revenue for expected year-over-year growth of 6% and 1% respectively.

The $0.86 estimate hasn’t changed since the last earnings report in June ’20 while the revenue estimate has jumped around, but saw higher revisions prior to the release.

The big issue with Oracle – like all the 1990’s tech giants, is the lack of revenue growth expected over the next three years, just 1% average over the next 3 years per consensus.

For Oracle, the cloud is as much a competitive threat as it is an opportunity, and while they played up the SAAS/PAAS/ IAAS growth several years ago, that petered out and Oracle stopped disclosing the data.

Per on sell-side analyst, the legacy dbase business has declined at about a 7% annual rate the last 3 years, which has forced Oracle to pedal harder on the new cloud offerings just to maintain low-single-digit secular revenue growth.

Trading at 13x expected 3-year average EPS growth and 12x – 14x cash-flow and free-cash-flow (ex-cash), revenue and EPS estimates are still declining – much of it Covid-19 driven as Larry Ellison noted that at the end of their fiscal May ’20 Q4, deals stalled as Oracle moved through fiscal Q4 ’20.

Oracle’s fundamental positives: 

The two things that strike me about Oracle today as fundamental positives are that the dollar has weakened substantially in the last 60 days, and that usually portends postively for firms like Oracle and IBm, if it’s sustained over a longer time period, and while Oracle’s cash position was 36% of Oracle’s market cap when the TCJA (tax reform) was passed in December ’17, and thus was used for stock buybacks, today it’s 21% and is starting to grow again from it’s low of 15% two quarters ago.

The dividend policy is interesting: Oracle typically sustains a dividend for 8 quarters (rather than 4, unlike most SP 500 companies which boost their dividend every year), and then raises that dividend.

Oracle’s dividend is just 25% – 30% of their free-cash-flow, so there is more room to increase that divvy.

Summary / conclusion:  The US dollar strengthened dramatically in late 2015, early 2016 when crude oil made it’s initial tumble from $75 down to $28 and change in Q1 ’16, so much that one economist noted that the dollar had its strongest 6-month tightening, in any period for the greenback. Once thatpressure abated, Oracle stock did better from 2017 forward until mid-2019 when it peaked at $60.

Beneath all this though is the continued issue with Oracle trying to figure out a cloud strategy. The cloud is both a competitive threat and an opportunity for the giant, and we still don’t know which way that falls.

Like Cisco, Oracle could stand to do less dilutive acquisitions, particularly with the stock’s valuation having compressed the last 3 years. A dilutive acquisition today would be pretty expensive for the software company, and with a debt-to-cap ratio of 60%, their ability to issue debt for a big deal might be eyeballed by the rating agencies. (Oracle senior unsecured debt is currently rated A, A3, and A- by Standard & Poors, Moody’s and Fitch respectively.)

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Oracle is outperforming the SP 500 in 2020 but continues to lag for 20, 10 and 5 year time frames.

As long as the stock stays above $45 or the 2000, highs, conservative investors can take the dividends and likely see some appreciation.

Given its chronic underperformance, clients don’t own a position of any material size.

Thanks for reading.




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