When it comes to investing, each stock has a good side, a bad side, and a ugly side. The goal is to pick stocks that have a lot of good, and not a lot of bad or ugly. Unfortunately, I don’t think that is the case when it comes to Oracle Corporation (NASDAQ:ORCL). Oracle stock is really heavy on the ugly.

Oracle is building out a big and growing cloud business that is helping transition the company to a new era of growth, but that transition is playing out quite slowly. Meanwhile, Oracle stock seems to have sprinted ahead of fundamentals in the near-term on irrational euphoria related to that cloud business.

All in all, I think ORCL stock, which is already down 15% off its 52-week high, has more room to fall in the near-term. As far as buying Oracle stock is concerned, I think $40 is the level to watch.

Here’s a deeper look:

The Good

The one really good thing about ORCL is Oracle Cloud. This burgeoning cloud business, which grew 32% year-over-year last quarter, has helped transition the entire ORCL company out of the dark ages. For a while, revenue growth had slipped into negative territory and margins were under pressure.

That is no longer the case today.

Largely thanks to big growth in Oracle Cloud, revenue growth has inflected into positive territory and margins are marching higher. Revenue growth has consistently run in the low-to-mid single digit range, and analysts expect it to remain there for the next several years.

Meanwhile, margins are up roughly 150 basis points year-to-date, and management expects margin expansion to persist alongside robust cloud growth.

All in all, ORCL has used Oracle Cloud to flip the script on its growth narrative from negative to positive.

The Bad

The one tell-all bad thing about Oracle stock is that it hasn’t gone anywhere over the past year. A year ago, this was a $45 stock. Today, it is still a $45 stock.

The reason for this sideways trading pattern is that the Oracle Cloud isn’t everything management makes it out to be. The business is relatively small in size (only $1.6 billion in revenues last quarter) and it isn’t growing as quickly as it should be given that relatively small size.

Revenue growth was just 32% last quarter, which was nothing compared with Amazon.com, Inc.
(NASDAQ:AMZN). Amazon Web Services, with a much larger revenue base of $3.7 billion, grew 43% last quarter.

Worse yet, Oracle Cloud’s slower-than-expected growth rate is going to slow even further. Next quarter, Oracle Cloud revenue growth is expected to be around 20%. That would be relatively anemic for a small cloud player.

Moreover, because Oracle Cloud is this company’s only major growth driver, slowing cloud revenue growth means slowing overall revenue growth going forward.

The Ugly

The Oracle stock price doesn’t reflect appropriate expectations regarding slowing top-line growth.

Year-to-date, revenues are up just 4% in constant currency, and that is with 40% cloud growth. Thus, if cloud growth does come down and stay around 20%, overall revenue growth will likely be lower than 4%. At best, this is a 3% revenue growth company after this year (fiscal 2018).

Operating margins should clock in around 45% this year. Continued cloud ramp will allow margins to keep heading higher. Assuming this ~100 basis points of margin expansion per year trend persists, then operating margins could hit 50% in fiscal 2023.

Even with 3% revenue growth per year over the next five years and 50% operating margins, I still see ORCL earning only $4.50 per share in fiscal 2023. That really isn’t that much considering Oracle stock price is currently $45.

A historically-average 14-times forward earnings multiple on $4.50 implies a fiscal 2022-end price target for ORCL of $63. Discounted back by 10% per year, that equates to a fiscal 2018-end price target of $43.

Bottom Line on Oracle Stock

When it comes to ORCL stock, there is some good, a lot of bad, and a healthy amount ugly.

As such, I don’t think this stock is worth touching here and now. If current weakness persists, though, the stock could become interesting around $40.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.