Oracle Cloud Initiative Could End Uptrend

Oracle Corp. (ORCL) is trading lower by more than 5% in Wednesday’s pre-market after beating fiscal Q4 2021 estimates and lowering Q1 2022 profit guidance. The software giant earned a respectable $1.54 per-share during the quarter, beating estimates by $0.21, while revenue rose 7.5% year-over-year to $11.23 billion, nearly $200 million higher than consensus. Shareholders hit the exits after the company warned it would “roughly double its Cloud CapEx spending in fiscal year 2022 to nearly $4 billion”.

Investing Revenue in Cloud Growth

Cloud computing is more profitable than overall business operations and Oracle is trying to increase market share and improve margins going forward. As a result, it’s “confident that the increased return in the Cloud business more than justifies this increased investment and margins will expand over time”.  However, disappointed investors held a less bullish view, voting with their feet to exit positions.

Success in the new investment is no sure thing because Oracle’s transition into cloud computing has been slower than its rivals, who have already built large and diverse customer bases.. As a result, it will be hard to take market share from Amazon.Com Inc.’s (AMZN) AWS or Microsoft Corp’s (MSFT) Azure in coming quarters, raising doubts about the initiative. In addition, while this high tech venue is growing at a rapid rate, so is competition, with many operations throwing their hats into the ring.

Wall Street and Technical Outlook

Wall Street consensus is skeptical as well, with a ‘Hold’ rating based upon 5 ‘Buy’, 1 ‘Overweight’, and 18 ‘Hold’ recommendations. In addition, three analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $60 to a Street-high $115 while the stock is set to open Wednesday’s session about $2 above the median $75 target. This mid-range placement suggests that Oracle is now fully-valued.

Oracle failed a 2019 breakout over the 2017 high at 53.14 during 2020’s pandemic decline and turned higher, breaking out in the fourth quarter. The uptick added more than 40% into early June’s all-time high at 85.03, ahead of a pullback that’s now accelerating to the downside. The decline has settled on the 50-day moving average in the pre-market, generating the first test since February, It’s likely to hold for now but the stock may be headed into months of sideways action.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.