Q2 Preview: Oracle Stock Faces an Earnings Backlash

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ORCL stock - Q2 Preview: Oracle Stock Faces an Earnings Backlash

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Within the broader technology sphere, Oracle (NYSE:ORCL) comes across as an outdated, perhaps irrelevant pick. However, ORCL stock has conspicuously weathered the market storm better than most. Throughout most of October and November, shares managed to stay profitable on a year-to-date basis.

Unfortunately, that one quantifiable tailwind favoring the database-solutions giant has lost its sail. December has turned out to be disappointing for Oracle stock, which has lost nearly 6% against this month’s opening price. Adding to the frustration, shareholders are now staring at a slight loss for the year.

Ordinarily, that wouldn’t cause much concern, especially because so many other tech firms have plunged right into the dumpster. The issue is Oracle’s upcoming earnings report for the company’s fiscal second quarter of 2019.

Investors really need to see Oracle step up its game. For quite some time, management has expressed potential for its core business transition. Currently, the bulk of the company’s revenues originate from traditional software licensing and product support. The intention, though, is to move ORCL stock as a cloud-oriented investment.

Such a transition keeps in line with industry trends, along with rivals such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). But prior ORCL earnings have reflected promises. This time, shareholders seek substance. But as Oracle stock ticks lower, this doesn’t communicate confidence.

So has ORCL stock witnessed its best days, or can it somehow convince Wall Street not to abandon ship? Let’s take a deeper look at its Q2 prospects:

ORCL Earnings Must Show Substance

If I can sum up the importance of the upcoming ORCL earnings report in one word, it would be “progress.” Shareholders appreciate that Oracle stock represents stability under duress. However, for shares to move convincingly higher, the Street must see meat on the table.

From the earnings perspective, ORCL stock is looking good. Consensus estimates for earnings per share call for 78 cents. Although, this is on the lower end of the spectrum, which ranges between 77 cents to 81 cents.

Additionally, over the last three years, Oracle has beaten EPS estimates every time, with two exceptions: Q4 2016 and Q1 2017. Overall, the misses weren’t terrible. Based on this history, I don’t expect any negative surprises for the upcoming disclosure.

Where everybody starts fidgeting nervously is the growth story. In the prior Q1 2019 report, Oracle fumbled the ball. Against a consensus forecast of $9.28 billion, the database firm delivered only $9.19 billion, or a 1% miss. While revenues increased 1% year-over-year, analysts deemed that figure unsatisfactory. Consequently, ORCL stock tumbled immediately after management revealed the results.

This time around, consensus calls for $9.53 billion. The good news is that this is a beatable target based on the company’s Q2 history. However, the flipside is that Oracle must deliver the goods, and do so quite convincingly. In the prior-year quarter, management reported actuals of $9.59 billion.

Another factor that the Street will scrutinize is revenue segmentation. Earlier this year, the leadership team decided to combine its cloud revenues with its platform and infrastructure businesses. As a result, we don’t see a separate line item for cloud sales.

Ultimately, they can do whatever they want. But if revenues slip again, Oracle stock may face serious trouble.

Timing Benefits ORCL Stock

Overall, I’m not super-confident about Oracle’s earnings report. The company is still working on its transition and the tough business environment hasn’t helped matters. That said, I don’t recommend giving up on ORCL stock.

For one thing, despite the terrible Q1 2019 report, Oracle stock only floundered briefly before spiking near this year’s highs. Yes, it was a temporary lift, but it confirms that shares don’t exclusively track earnings performances.

But the other tailwind is the timing. While other tech firms are struggling for traction, ORCL stock has held up well. I expect this trend to sustain itself, considering that management is sitting on roughly $60 billion in cash.

Ideally, of course, you don’t want to invest on the basis of not losing as much. But when you’re certain of crashing, it’s better to sit inside an SUV than attempt corrective maneuvering in a motorcycle.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/oracle-orcl-stock-earnings-preview/.

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