Bellwether Oracle Fails To Impress The Market
Oracle NYSE: ORCL just released its fiscal Q4 earnings and the shares are down nearly 5% in premarket trading. The report is important for more reasons than one, not only is the report pertinent to Oracle but Oracle's Q4 ended on May 31st. That fact makes this report more of a preview for what the calendar second quarter will look like for the broader S&P 500 than anything else. As for Oracle itself, we think there are two reasons why hares are falling. The first is that, while good sequentially and in comparison to last year, Oracle's results were not that impressive. The second is that we are on the cusp of a major shift in economic conditions.
The FOMC is about to embark on a course of tapering and tightening which means a fundamental change in tactic for debt-laden companies like Oracle. Oracle's debt is not debilitating, far from it, but it does carry a 5.5 leverage ratio and the total debt in excess of $65 billion. With interest rates set to rising sometime in the near future, Oracle is going to have to start paying down its debt instead of refinancing it to later years like oh so many S&P 500 companies have been doing.
Oracle Beats Consensus On The Top And Bottom Line
Oracle's fiscal Q4 results are good but they aren't really great. The best thing that they reveal is the company's strategy of switching toward cloud and cloud services is working to keep it relevant in the modern digital world. On the top line, the $11.23 billion in net revenue is up 7.6% from last year and beat the consensus by $190 million. In our view yes, the beat is good but only 170 basis points which is not a wide margin, and the revenue is only flat in the 2-year and 3-year comparison. On a segment basis, cloud services and license support revenue increase 8% YoY, Cloud licensing revenues were up 9% YoY, and Cloud infrastructure Revenue including the Gen2 Cloud is up 100% YoY.
“Independent analysts have tested and confirmed that Oracle MySQL with HeatWave runs 10 to 100 times faster than Amazon's version of MySQL called Aurora. This technological breakthrough is causing several of Amazon's customers to start moving their Aurora workloads to Oracle MySQL … Both the Oracle Autonomous Database and Oracle MySQL with HeatWave technology have captured the technology high-ground in the cloud database business—and that bodes well for the future of the Oracle Cloud," says chairman and founder Larry Ellison.
Moving down the report, the company was able to improve its non-GAAP operating margin by 600 basis points which may be the best news of the entire report. While revenue is basically flat over the three-year period, earnings have been on the rise. the adjusted operating margin came in at 49% to drive earnings per share of $1.54. to beat the consensus by $0.21 and grow $0.34 over last year. More importantly, operating cash flow is up 21% for the year and reached a company record $15.90 billion in fiscal 2021.
The Technical Outlook: Oracle Is In A Correction
Shares of Oracle were not overvalued relative to the broad market trading at 17 times earnings but they're getting cheaper. Today's news has the stock down about 5% and well below what we would consider being key support levels. The price action may find support at or near the $76 level but the risk now is short-term traders will provide resistance at the 30-day EMA. If price action rebounds from here, we will remain wary until it crosses back above the short-term moving average and reconfirms support. Until then, this blue-chip, dividend-paying tech stock deserves a spot on our watch list. A move below the $76 level could take this stock down to $72 or lower.
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