The Sell-Side Reaction To Oracle's Earnings Beat, Cloud Weakness

Shares of Oracle Corporation ORCL were trading lower by around 5 percent Friday after the company's fiscal second quarter report showed an earnings beat — but its cloud infrastructure and platform revenue fell short of expectations.

Barclays: Continued Weakness

Barclays' Raimo Lenschow maintains an Overweight on Oracle's stock with a price target lowered from $59 to $56.

Oracle's Q2 results were "solid," but this may be overshadowed by weakness in the cloud business that started in the first fiscal quarter, Lenschow said in a research report. Oracle's report may also signal a "change in narrative away from the cloud transition," which could limit multiple expansion moving forward, the analyst said. 

Licenses were flat on a year-over-year basis in the quarter, which exceeded Wall Street's expectations of an 8-percent decline, Lenschow said. The company did cite its "Bring Your Own License" program as a reason for the outperformance.

Oracle's stock still looks cheap on an absolute basis at 11.5x CY2019E EV/FCF, which justifies a continued bullish stance, according to Barclays. 

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Morgan Stanley: Cloud Strategy Confounds Investors 

Morgan Stanley's Keith Weiss maintains an Equal-weight on Oracle's stock with an unchanged $50 price target.

Oracle's Q2 marks the second consecutive quarter of delivering earnings per share growth of at least 10 percent, Weiss said in a research report.

The company's strength was driven by better-than-expected on-premise licenses and improving margins, the analyt said. But Oracle's cloud strategy continues to "confound" investors, which could put a cap on the stock's multiple in the near-term, he said.

Specifically, both SaaS and PaaS/IaaS missed revenue expectations in the quarter, while gross margins for both categories continued to decline sequentially.

"To further confuse the matter, management brought into the fold the idea of new 'good' IaaS/PaaS which is growing 40 percent-plus versus $500 million of old 'bad' managed hosting business which is declining 10 percent YoY," Weiss said. 

Bottom line, investors may want to wait for further clarity on the company's broader Oracle Cloud strategy before assuming future success in growth, according to Morgan Stanley.

Credit Suisse: Focus On Traditional Metrics

Credit Suisse's Brad Zelnick maintains an Outperform on Oracle's stock with an unchanged $62 price target.

Oracle's earnings report was "solid" even though cloud revenue fell short of expectations, Zelnick said in a note. 

The analyst highlighted five aspects of Oracle's Q2 that he said were favorable: 

• A fiscal third quarter revenue and EPS guide that looks favorable versus the Street's expectations. 
• SaaS bookings guidance of $2 billion over four quarters, implying an approximate 50-percent new business growth rate. 
• Deferred revenue of $8.1 billion was $120 million above the Street's estimate. 
• License revenue grew 0.4 percent year-over-year versus the Street's negative 8-percent estimate and marks the best growth in 15 quarters.
• A $12 billion incremental share buyback authorization.

Zelnick cited four aspects of the quarterly report that Credit Suisse "liked less":

• Poor cloud performance due to continued revenue recognition delays.
• The third-quarter cloud guidance came in below the Street's estimate yet again.
• Operating cash flow of $0.85 billion fell short of the $1.03 billion expected.
• The Asia Pacific business fell 2 percent, although it can be attributed to a tough compare.

"Consistent with our thesis and with a difficult-to-predict yet definitive cloud transition, we focus on traditional metrics, which are strong in aggregate," the analyst concluded. "We would be buyers on any weakness caused by confusion around mix."

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