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

Oracle Corporation ORCL's fiscal third-quarter earnings report Monday could be a signal it will be difficult for Larry Ellison's company to catch up with cloud peers, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Monika Garg downgraded Oracle from Overweight to Sector Weight with no assigned price target. 

The Thesis

The bullish case for owning Oracle's stock was based on expectations for acceleration in cloud revenue that would help reverse two years of underperformance, Garg said in the downgrade note. But the company's Q3 disappointed, as cloud revenue fell short of expectations.

Oracle guided its fiscal fourth-quarter cloud business to grow just 19 to 23 percent, below the consensus estimate of 24 percent, the analyst said. The disappointing outlook comes at a time when the company is benefiting from a lower-than-expected decline in on-premise license revenue, she said. 

KeyBanc expects Oracle's cloud business to grow 21 percent in fiscal 2019 and 18 percent in fiscal 2020, Garg said. New license revenue is expected to decline by 5 percent in fiscal 2019 and fiscal 2020.

Oracle's latest earnings report signals that its transition to the cloud is "taking longer than initially expected" while rival cloud businesses are growing at a faster rate, Garg said. 

Price Action

Shares of Oracle were trading lower by 9.28 percent at the time of publication Tuesday. 

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