Oracle Earnings Beat Wall Street Estimates; Buy with Target Price $64

Oracle, an American multinational computer technology corporation, reported better-than-expected earnings in the second quarter of the fiscal year 2021, largely driven by a surge in sales of software licensing and cloud product due to extended work from home in response to the COVID-19 pandemic.

One of the largest vendors in the enterprise IT market said its net income increased to $2.44 billion, or 80 cents per share, in the quarter ended November 30, up from $2.31 billion, or 69 cents per share, seen in the same period last year.

Excluding items, the company reported EPS of $1.06 per share, beating Wall Street estimate of $1 per share. In addition, total revenues increased 2% to $9.8 billion, beating market expectations of $9.79 billion.

“Oracle reported second-quarter fiscal 2021 results beating CapIQ consensus estimates for revenue and adjusted earnings per share. Notably, on the earnings call, however, was Chairman Larry Ellison’s comments on how Oracle’s supply fell short of demand as a result of Oracle’s lack of capacity in Oracle Cloud Infrastructure, or OCI, which is Oracle’s infrastructure as services, or IaaS, offering,” said Julie Bhusal Sharma, equity analyst at Morningstar.

“While demand for Oracle’s IaaS is encouraging, Oracle’s inability to forecast such demand is not, and we expect overall demand for OCI to still fall short of what demand is for more robust IaaS competitors like AWS and Azure. Considering the quarter’s results and third-quarter outlook roughly in line with our former expectations, we are maintaining our fair value estimate of $53 per share for Oracle. With shares hardly moving around its $60 per share market price after hours, we would recommend waiting for a pullback before committing capital to the wide-moat name,” Sharma added.

Oracle’s shares closed 0.42% lower at $59.48 on Thursday. However, the stock is up over 12% so far this year.

Oracle Stock Price Forecast

Fourteen equity analysts forecast the average price in 12 months at $64.75 with a high forecast of $71.00 and a low forecast of $57.00. The average price target represents an 8.86% increase from the last price of $59.48. From those 14 analysts, four rated “Buy”, ten rated “Hold” and none “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $67 with a high of $84 under a bull-case scenario and $45 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the multinational computer technology corporation’s stock.

“Our new price target of $67 is based on a 14x multiple applied to our CY22 EPS estimate of $4.83. Our old price target of $62 was based on 14x multiple applied to our prior $4.51 CY21 EPS estimate,” said Keith Weiss, equity analyst at Morgan Stanley.

Several other analysts have also upgraded their stock outlook. Barclays raised the stock price forecast to $66 from $62; RBC upped the target price to $71 from $68; Piper Sandler increased the price objective to $57 from $50; JP Morgan raised the price target to $68 from $61; Credit Suisse upped the target price to $67 from $66.

Analyst Comments

“Oracle’s current low valuation at 13x CY22e EPS reflects its slower growth rate compared to peers. Despite potential opportunities within existing database customers and cloud-based ERP applications, offsets from waning businesses mean 2021 likely lacks the catalysts for the positive inflection in revenue growth investors would need to see to drive multiples higher,” Morgan Stanley’s Weiss.

“We see 15% EPS growth in FY21 and 6% in FY22, driven by an aggressive pace of share buybacks. However, cc revenue growth is 2%, in a software sector filled with strong secular growth stories, and just 2% operating income growth points to Oracle potentially reaching peak margins, leaving us Equal weight at our $67 price target.”

Upside and Downside Risks

Risks to Upside: 1) Stronger adoption of Autonomous Database offering drives positive YoY growth in License revenues. 2) Accelerated adoption of Fusion Apps – highlighted by Morgan Stanley.

Risks to Downside: 1) Disruptive technologies in the data management market. 2) Rapid migration towards SaaS-based subscription application model hurts near-term optics due to ratable revenue recognition. 3) Strong competition from other secular Cloud application vendors.

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