Consumer discretionary

Oracle Corporation (ORCL): Here’s Why Analyst Says Stock is Fairly Valued

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Analyst anticipates solid growth in EPS and operating margins as Oracle competes with cloud-database services

MKM Partners analyst Kevin Buttigieg has updated his thesis on Oracle Corporation (NYSE:ORCL) recently, as he believes the stock is fairly valued. Oracle is set to unveil its financial results for the fourth quarter of fiscal year 2016, after the closing bell on June 16. The analyst maintains a Neutral rating on the stock as he anticipates a strong fourth quarter ahead. The firm has a price target of $42 on the stock which is 15 times its FY17 earnings per share estimate. The price target reflects 8.41% upside potential over the last close of $38.74.  

Mr. Buttigieg expects 1QFY16 results to be in line with consensus estimates, reflecting solid annual growth in EPS and operating margins. Investors look forward to growth as the $159.5 billion company makes a smooth transition to the cloud. Based on the already low expectations, the analyst believes that license revenue income would not miss the Street, unlike previous quarters. Also, given that the prior promotions have expired, the analyst anticipates strong growth in cloud revenues. However, the company might face challenges in annual recurring revenue due to the sharp rise in software-as-a-service and platform-as-a-service, he noted.

Oracle’s current price-to-earnings ratio of 14 times is not only ahead of its own historical average of 13 times, but is also ahead of the peer group’s P/E of 12 times. Oracle shares appear “fairly valued” to the analyst, as he states: “Oracle’s stock likely won’t be able to command more of a premium from expectations of this impact flowing through the financial model in future years because of the offsetting effect from declining license revenue (and perhaps maintenance, although this hasn’t happened yet). So unless license and/or SaaS and PaaS revenue can exceed consensus and drive better EPS, the shares appear fairly valued in our view.”

Oracle missed licensing revenue expectations in past quarters, but for 4QFY16, MKM Partners believes the technology provider would report licensing revenue in line with the consensus estimate of $2.8 billion. Note that the consensus estimate has a 10% year-over-year decline factored in.

The analyst estimates $665 million in SaaS and PaaS revenues, ahead of the consensus estimate based on their continued strong growth. This should lead to EPS and revenue figures in line with the consensus estimate of 82 cents and $10.46 billion, respectively. Moreover, the consensus also expects first full year growth in EPS and operating margins for FY17 since FY14. This might be positive for investors as Oracle is completing its transition to the cloud business model.

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