UBS: The Street Isn't Pricing In Oracle's Cloud Transition

The transition of Oracle Corporation ORCL's infrastructure business into the highly competitive cloud could prove tricky, and this risk is not being fully reflected in Street estimates, according to UBS.

The Analyst

UBS analyst Jennifer Swanson Lowe assumed coverage of Oracle stock.

The Rating

UBS assumed coverage of Oracle shares with a Neutral rating and a $55 price target. The firm earlier had a Buy rating and $57 price target for the IT company.

The Thesis

The difficulty in the transition of Oracle's infrastructure business into the cloud stems from a larger impacted revenue base; the move away to a highly competitive cloud market, the less attractive margin characteristics of IaaS and PaaS; and limited opportunity to smooth/accelerate the transition via M&A, Swanson Lowe said. (See Swanson Lowe's track record here.) 

Oracle's hard push into the cloud is the right move from a futuristic perspective, Swanson Lowe said. 

See also: The Core Reasons To Buy Oracle Haven't Changed

Given the premium multiple at which Oracle stock is trading relative to historical multiples, a Neutral rating makes sense, Swanson Lowe said. Street estimates apparently do not fully reflect the near-term risk to margins or growth amid the shift in Oracle's business model, the analyst said.

"However, Oracle's defensive profile (large balance sheet for buybacks, dividend yield) and undemanding relative valuation, along with 'good enough' financial results on low expectations offer downside support."

UBS expects cloud revenue growth, which is estimated in the low single digits, and limited margin expansion to offset steady declines in on-premise.

It will take time for Oracle's cloud to fully resonate with buyers, according to UBS.

Meaningful share gains in IaaS/PaaS could drive growth in Oracle's earnings per share, Swanson Lowe said.

The Price Action

At the time of writing, Oracle shares were off 1.27 percent at $49.90.

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Strategist Breaks Down A Stagnant Tech M&A Scene

Oracle cofounder Larry Ellison. Courtesy photo.