Morgan Stanley: Oracle Is A Buy Ahead Of The Q3 Print

Oracle Corporation ORCL is scheduled to release its fiscal third-quarter results after the market close on Monday, March 19. The consensus estimates call for earnings per share of 72 cents vs. 69 cents last year and revenue of $9.78 billion, up 5.5 percent year-over-year.

Over the last four quarters, Oracle has beat consensus expectations. Will the cloud computing company post a beat again?

Morgan Stanley forecast that Oracle's EPS will slightly trail expectations, but the firm said the potential exists for positive EPS revisions in the back half of the fiscal year.

The Analyst

Morgan Stanley analyst Keith Weiss has an Overweight rating on Oracle with a $57 price target, suggesting roughly 9-percent upside from current levels.

The Thesis

The upcoming Q3 results are likely to serve as a catalyst to push expectations Oracle's EPS and stock higher, Weiss said in a Thursday note.

Low investor expectations in the wake of subpar SaaS and PaaS/IaaS Cloud components in each of the last three quarters; an "undemanding" multiple; forex tailwinds; and a strong data center spending environment frame an attractive risk-reward set-up, the analyst said

Morgan Stanley projects potential for upward revision to EPS estimates if recent incremental positive continue into Q3. Thoser positives include the 12c database cycle helping outperformance of the license business; stronger on-premise licensing pushing operating margins higher; and a lift in stock repurchase activity, Weiss said. 

Further support for EPS should come from the potential for SaaS business outperformance on the basis of strong underlying demand, tempered expectations that now look beatable and a lower tax rate, the analyst said.

Morgan Stanley's Q3 Expectations

• Cloud revenue: 25-percent growth
• New software license and Cloud: 13-percent growth
• Total revenues: $9.8 billion, 5.7 percent above consensus 
• SaaS gross margin: 66 percent, up 70 basis points year-over-year
• Total gross margin: 79.8 percent, down 10 basis points 
• Operating expenses: up 18.8 percent
• Operating margin: 43.8 percent, up 126 basis points vs. consensus estimate of 44.1 percent
• EPS: 71 cents 

Morgan Stanley said it will pay particular attention to the ability of the database cycle to lift license revenues, the likelhood of outperformance in the SaaS business and the impact of the reduced U.S. corporate tax rate on Oracle's EPS. 

The Price Action

Oracle shares are up about 22 percent over the past year, while the year-to-date gain is a more modest 11 percent.

Related Links:

Vetr Crowd Downgrades Oracle

Report: The 10 Most Overpaid S&P 500 CEOs