Last year for Oracle Corporation (ORCL) was one to forget, with the stock off about 18%.
The problem? Well, for the most part, ORCL has been slumbering along as the tech market continues to innovate, whether with cloud computing, mobile or big data. Even the core database business is coming under pressure.
While ORCL has been taken some actions lately to improve the situation, the efforts may prove to be too late.
Actually, the latest quarterly report tells the story. Consider that total revenues dropped by 6% to $9 billion and profits fell by about 12%.
And yes, the guidance for fiscal Q3 was also disappointing. The company expects revenues of 60 cents to 63 cents and revenues of $9.08 billion, while the Street was looking for profits 65 cents and revenues of $9.28 billion. In light of this, ORCL stock plunged about 6%.
What ORCL Stock Needs to Change
Now, part of the fall-off is due to the surge in the U.S. dollar. But interestingly enough, the move towards the cloud may also be having a dampening effect.
How? This is because of the business model. Instead of charging customers up-front payments and ongoing maintenance fees, there is a subscription charge for the software. All in all, it generally means lower revenues.
Of course, this is not a problem for a pure-play cloud operator like Salesforce.com, Inc (CRM) or Workday Inc (WDAY) since there is no need to transition the existing customer base. If anything, this has made it easier for these companies to pick off customers from ORCL.
InvestorPlace.com’s Brian Nichols has explained the situation as follows for ORCL:
“Nevertheless, SaaS/PaaS revenue rose a total of $123 million during its last quarter. However, software license revenue in its on-premise business fell $368 million during the same quarter, thereby illustrating that Oracle is losing much more than it is gaining.”
This means it could take some time to make up for the gap. According Citi analyst Walter Pritchard, ORCL may not reach the break-even point for eight to 10 years!
But the other problem for Oracle stock is that there is potential for disruption, especially with the core database business.
Keep in mind that Amazon.com, Inc. (AMZN) has its own offering, called Auroroa. In fact, the company recently launched a product — AWS Database Migration Service — which makes it easy for customers to move away from ORCL.
Bottom Line for Oracle Stock
The environment for IT spending could feel a chill very soon. With the wrenching market volatility and slowing of global growth, there will likely be many CEOs who will hold off on big purchases of software. Or, they may be more inclined to look at cost-effective alternatives, such as from Amazon or WDAY.
Something else that could make the Oracle stock price vulnerable: the transition to the cloud is still in the early stages, with the segment representing only about 7% of overall sales. This means there will probably not only be prolonged pressures on the top line but also further threats of losing customers to rivals.
So, given the overall uncertainties in the market, competitive pressures and the belated move to the cloud, it’s best to stay clear of Oracle stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.