Oracle Corporation (NYSE:ORCL) proved the point that it doesn’t matter how impressive your performance metrics are. At the end of the day, investor perception is everything. Unfortunately for Oracle stock, that perception was extremely negative.
As our own Bret Kenwell stated, the database and cloud-computing giant produced solid numbers for its recent third-quarter earnings report. Kenwell wrote:
“Earnings of 83 cents per share came in 11 cents or 15% ahead of analysts’ expectations. Revenue grew 5.5% from the same period a year ago. Cloud software as a service (SaaS) grew 33% year-over-year (YOY), while Oracle saw an increase of 32% in total cloud revenues.”
Other highlights included GAAP-basis operating income jumping 15%, while GAAP net income rising 21% YOY. So why then did Oracle stock fall more than 9% following the Q3 report?
Kenwell identified two possible reasons. One of them is that forward guidance, especially in the cloud business, was disappointing. With more industries competing in this lucrative sector, Wall Street wanted to see more assertiveness. They didn’t get that, hence the drop-off in Oracle stock.
The second reason is that cloud profitability is weaker than expected. Management set a target for an 80% gross margin rate, while the actual rate in this quarter was 67%. That’s a very modest lift from the 65% gross margin from the year-ago quarter. Investors didn’t like what they saw, perceiving weakness in their cloud ambitions.
However, I think the Oracle stock dumping had more to do with broader concerns than Oracle’s lack of competitiveness.
Oracle Stock Is Still a Top Contender
When assessing an established firm like Oracle, I think it’s important not to overemphasize disrupting competitors’ net impact. For instance, salesforce.com, inc. (NASDAQ:CRM) produced strong results in the cloud, yet since mid-March, their shares are down 8.6%. Why aren’t people complaining about CRM the way they are for Oracle stock?
Let’s also look at Amazon.com, Inc. (NASDAQ:AMZN). I love this company as much as anyone else, primarily because it’s the disruption king. You don’t even have to be involved in the technology sector, and it’ll still find a way to disrupt you. Of course, Amazon is competing aggressively in the cloud, and the results are encouraging.
What’s not encouraging? Again, from mid-March, AMZN shares are down 8.5%. So not only are cloud competitors falling in the same timeframe, the loss magnitude is similar. Granted, ORCL stock hurts more, but not by a huge margin. That tells me that something other than lack of cloud competitiveness is driving the bearishness.
Unfortunately, you can take your pick. Whether it’s Trump administration drama, China tariffs, North Korea, or rising interest rates, we have no shortage of problems. None of these things have anything to do with ORCL, but the stench remains.
Despite the broader concerns and the Oracle stock bloodshed, the underlining company is still a top contender in the cloud. Certainly, it’s not the sexiest name, and it doesn’t get the same attention as the younger upstarts. Nevertheless, Oracle is winning where it matters: with whale clients.
The company’s database management systems are consistently the most popular. This isn’t surprising because they have decades of experience meeting the most rigorous demands. Thus, ORCL attracts major firms like AT&T Inc. (NYSE:T), who appreciate having “software, platform, and infrastructure under one umbrella.”
Poor sentiment for ORCL stock is a Longer-term Opportunity
Longer-term, I stand by my earlier optimism for Oracle stock. However, I also know that the markets are always right. Unfortunately, ORCL is a classic case of a fundamentally sound company in a less-than-ideal environment.
In time, I believe that the overall situation will improve. For now, I caution anyone from going too deeply into ORCL stock. Since July of last year, shares have formed a declining support line. The severe gap-down session after the Q3 earnings report has inflicted significant damage, meaning more downside is likely.
How bad are we talking? At minimum, we’ll fall to $44, which represents roughly a 4% decline from the current price. But the next biggest support line is around $38, which is a 17% decline from here.
That’s the bad news. The good news is that should Oracle stock fall that low, this would be an extremely attractive opportunity. Wall Street is excessively pessimistic about Oracle’s cloud competitiveness, which I find strange. Moreover, this is an organization that has consistently attracted big-name clients thanks to its superior products and services. That’s not going to change anytime soon.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.