“Paralysis by analysis” is a commonly expressed warning on Wall Street. It also applies perfectly to Oracle Corporation (NYSE:ORCL). Typically, your average investor is careful, which is a wise characteristic. But at a certain point after you perform due diligence, you just have to pull the trigger.
Oracle stock gives you a great play in the technology space, yet traders hate it for not being absolutely perfect.
How else can you explain the negative reaction to ORCL stock following the company’s second quarter fiscal 2018 earnings report? Going into Q2, the analyst consensus called for 68 cents earnings per share, which was near the lower end of the estimate range. However, the actual EPS came in at 70 cents, which was at the top of the range.
Furthermore, it wasn’t that surprising that the tech firm posted impressive numbers. In my earnings preview for Oracle stock, I mentioned the “quiet optimism” supporting the bullish argument.
ORCL was riding on a healthy winning streak. On a year-over-year basis, analysts were expecting more out of the company. Management delivered in the past, and it delivered just recently.
Unfortunately, someone forgot to tell Oracle stock that good news really is good news. On Dec. 14, ORCL closed at $50.19. The next day after the earnings disclosure, shares gapped down to close at $48.30, or a loss of nearly 4%. At the most recent close, shares are off nearly 6% since Q2.
That’s a remarkable response for a company living up to raised expectations. Of course, you shouldn’t be surprised that I find the downside move irrational.
My colleague Nicolas Chahine had some pointedly amusing words for the market’s response to Oracle. He wrote that:
“ORCL stock investors hated what they saw. Management over-delivered on its promises and increased its buybacks. But traders ignored all the successes and chose to focus only on a disappointing cloud business growth forecast.”
However, Chahine further notes that heading into the Q2 report, Oracle stock was up 30% year-to-date. In addition, the major indices had a phenomenal year in 2017. For instance, the benchmark S&P 500 index closed out 2017 up almost 19%. Several pundits have expressed concerns that the broader markets are overheated. Looking at the technical charts, I don’t necessarily disagree.
We also need to have some perspective. ORCL stock is a blue-chip tech company, not a sexy startup. From a practical perspective, absorbing steep losses here is difficult to make up. Oracle is not a cryptocurrency. You could end up parking your money for a long time before evening out a loss.
That said, potential buyers could use this opportunity to buy Oracle stock at a discount. Aside from technical momentum concerns, most bears are focused on the company’s poor performance in the cloud division. As our own Tom Taulli notes, the current leaders in the cloud could impinge on Oracle’s core database business. However, I think the competitive threat is overstated.
I’m not taking away anything from cloud operators like Amazon.com, Inc. (NASDAQ:AMZN) or Microsoft Corporation (NASDAQ:MSFT). But these names are more relevant for consumer-level and small-business applications. This is my opinion only, but I don’t think they have proven themselves in the big-boy arena.
When I worked for Sony Corp (ADR) (NYSE:SNE), we used Oracle products to handle our accounting procedures. I would have been laughed out of the company if I had suggested a Microsoft or Amazon platform. For serious businesses, you’re going to opt for either Oracle or SAP SE (ADR) (NYSE:SAP).
I think it’s quite telling that AT&T Inc. (NYSE:T) was drawn in by Oracle’s comprehensive package, which brings software, platform, and infrastructure under one umbrella. Winning in the cloud isn’t just about raw numbers; you have to look at who you’re bringing in. I’m confident in Oracle stock because they’re pulling in the whales, not just Joe from down the street.
One of the common bearish arguments is that ORCL will have a more difficult time improving its cloud business than would Microsoft or Amazon breaking into the database business. I must disagree. It’s one thing to provide a cloud platform for off-site storage needs. It’s quite another to offer a proven, reliable database to handle a multibillion-dollar entity’s administration.
Oracle has its flaws; that much is certain. But the database game is a lot tougher than many people realize. The company has proven itself consistently in this space. Moreover, I think it’s a mistake to underestimate management’s ability to correct its shortcomings. As a longer-term investment, ORCL stock is a shrewd buy, especially after this correction.
As of this writing, Josh Enomoto is long SNE.