Crushed After Earnings, Oracle’s Silver Lining Just Isn’t There (ORCL)

It's hard to envision a situation where Oracle stock excels over the near term

Shares of enterprise software giant Oracle (ORCL) have struggled this year, losing 13% of its value as of Wednesday’s close and another 4% as of early morning trading Thursday. That’s what happens when you cannibalize your own licensing revenues, a much larger chunk of its business, by racing to attract customers to its cloud-based services.

Crushed After Earnings, Oracle's Silver Lining Just Isn't There (ORCL)Investors saw this Sisyphean narrative continue to play out in the fiscal second quarter, and yesterday ORCL reported that both earnings and revenue fell year-over-year.

Oracle’s adjusted per-share earnings of 63 cents beat the estimate of 60 cents, but its $9 billion in revenue failed to meet the $9.06 billion consensus.

But considering a slight revenue miss isn’t that meaningful to the big picture, why did ORCL stock crater on the news?

Well, unfortunately for ORCL stock owners, the big picture itself looks rather murky, largely because of the growing importance of cloud services. That’s both a good and a bad thing for Oracle, but since the market hates uncertainty, it’s mostly a bad thing.

A Catch-22

Oracle saw impressive, 26% growth in cloud revenue in the second quarter: Cloud revenue would’ve jumped 31% had it not been for currency headwinds.

For what it’s worth, the strong U.S. dollar is also working against the Oracle stock price: Revenue fell 6% year-over-year but would’ve been unchanged if foreign exchange rates remained stable.

This strong cloud growth is great in the sense that ORCL needs to fight to make up ground on companies like Salesforce (CRM) and Workday (WDAY), the leaders in software as a service and platform as a service offerings.

And it’s doing just that — Oracle grew cloud SaaS and PaaS revenue to 38% in the past quarter and expects to accelerate that growth in the coming quarters to between 49% and 53% in Q3 and 55% and 59% in Q4.

Still, the cloud made up just 7% of overall ORCL revenue in the second quarter, while 71% of the company’s business comes from traditional software licensing. That business is being cannibalized by the cloud, and right now it’s a lousy trade-off.

Cloud revenues jumped $133 million year-over-year, from $516 million in Q2 2015 to $649 million in Q2 2016. Meanwhile, revenue from new software licenses dipped 18%, while on-premise software revenues fell 7%, or $453 million, to $6.36 billion from $6.81 billion a year ago.

Ironically, Wall Street’s biggest beef with ORCL stock stems from its cloud growth erring on the side of being a little bit too strong.

Daniel Ives, an analyst with FBR & Co., actually lowered Q3 revenue estimates from $9.28 billion to $9.19 billion and slashed Q3 EPS estimates from 66 cents to 61 cents “given our slightly lower license expectations with the company’s rapid transition to cloud revenue and continued currency impact.”

So if Oracle doesn’t adequately grow its cloud business, it forfeits a major long-term opportunity to become a crucial player in the newest, hottest pocket of tech.

Then again, rapid growth in its cloud business means cannibalizing revenue from its much larger licensing segment, slowing ORCL’s overall growth, at least in the short-term.

Oracle earnings only confirmed how difficult it is for the company to come away from this scenario a winner anytime soon.

With hundreds of publicly traded tech stocks to choose from, investors should stay away from Oracle until its long-term picture comes into focus.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/orcl-stock-oracle-price/.

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