Oracle Corporation (ORCL) Stock Is a Strong Buy After Q1 Earnings Beat

Heading into its fiscal first-quarter earnings report on Thursday afternoon, Oracle Corporation (NYSE:ORCL) had posted a quiet, but strong, year. ORCL stock was up over 37% year-to-date, though that strength seemed overshadowed by huge gains at other large-cap tech plays.

Oracle Corporation (ORCL) Stock Is a Strong Buy After Q1 Earnings Beat

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Fears about the company’s vulnerability to newer, younger, cloud-based competitors had left the stock basically flat for three years from early 2014 to early 2017. But newfound enthusiasm toward Oracle’s own cloud potential had led to a bit of a ‘catch-up’ rally in Oracle stock.

But newfound enthusiasm toward Oracle’s own cloud potential had led to a bit of a ‘catch-up’ rally in Oracle stock.

That rally should be extended after Oracle posted a nice Q1 earnings beat. Overall, the numbers look good. Cloud growth looks even better. And with Oracle now looking like a legitimate player in cloud — not a victim of the disruption caused by that trend — ORCL stock looks to have a lot more rallying left to do.

Q1 Earnings

The headline figures for Oracle earnings in Q1 look solid, as our Hilary Kramer predicted last week. Adjusted EPS of $0.62 rose 12% year-over-year. The figure beat consensus estimates by two cents, and was above the company’s guided range of $0.59-$0.61.

That beat wasn’t driven by taxes, either, as has been the case at a number of companies of late (see, for instance, Microsoft Corporation (NASDAQ:MSFT) Q4 earnings in July). The non-GAAP tax rate of 25.0% actually was higher than the expected 23.5% (itself a penny per share hit), ad basically flat year-over-year.

The news might have been even better on the top line. Revenue of $9.19 billion increased 7% year-over-year, two full points better than the average Street estimate. In fact, the number come in above the highest of the 28 analyst estimates.

How Oracle drove that growth helps the bull case as well. Cloud revenue rose 51%, toward the end of guidance for 48-51% growth. The figure totaled $1.5 billion in the quarter; just last year, Oracle set a goal of reaching $2 billion in cloud sales for the entire year.

The strength was enough that CEO Mark Hurd even felt comfortable calling out competitors in the Q1 release. He pointed out that Oracle’s cloud apps business was growing more than twice as fast as that of, Inc. (NYSE:CRM). Hurd added that the company has 30 times as many ERP (enterprise resource planning) customers as high-flying stock Workday Inc (NYSE:WDAY). And after a quarter like Q1, Oracle does have some reason to strut.

ORCL Stock Looks Like a Buy

The message Hurd and Oracle were trying to give seems pretty clear. Oracle is back, and it’s a legitimate giant of its own in the cloud space, not a once-great on-premise software company trying to make a comeback.

In other words, the ORCL story looks a lot more like Microsoft than International Business Machines Corp. (NYSE:IBM). But ORCL stock actually is valued closer to IBM than to MSFT.

Full-year EPS estimates likely will come up after the report, but even with 1% after-hours gains ORCL stock still trades at less than 18x FY18 EPS estimates. Those estimates look low as well, against post-Q4 guidance for double-digit growth this year.

Assuming ORCL received a multiple closer to MSFT’s 22-23x figure, ORCL could hit $70 by year end – another 30% upside from after-hours prices around $53. That’s not a huge multiple in the context of 50%+ cloud growth, a rock-solid balance sheet (ORCL actually has net cash), and improved market share.

In short, it looks like the cloud story at Oracle is just beginning. And even after nearly 40% gains year-to-date, that means investors still have time to buy into that story.

As of this writing, Vince Martin has no positions in any securities mentioned.

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