It’s a generally a quiet time of the year for earnings and a lot of focus is on The Fed’s March meeting, but tech heavyweight Oracle Corporation (NYSE: ORCL) earnings come out after market close today. Going into earnings, Oracle’s stock price is up a little over 11% year-to-date and has outperformed the S&P 500 (SPX) by just over 5%. But this is after underperforming the SPX by over 5% in 2016 and lagging the SPX by a substantial 18.8% in 2015.
Oracle’s earnings growth and stock performance has lagged the software industry’s for several years. Some analysts thought this was due to concerns over the company’s ability to transition its core business from declining hardware and software sales to cloud-based products. This has been a similar challenge facing other legacy tech companies like Cisco Systems, Inc. (NASDAQ: CSCO) and Microsoft Corporation (NASDAQ: MSFT). Oracle’s total cloud revenue grew 62% year-over-year, to $1.05 billion, in the 2nd quarter and offset the enterprise database giant’s 10% decline in hardware revenues and 4% decline in on-premise software revenues to keep total revenue flat to last year.
In its last earnings release, Oracle issued less optimistic projections than it normally does and the company’s earnings and revenue growth have faced downward pressure from a strong US dollar.
Buying Up The Cloud
Oracle has made 40 acquisitions since 2012. Its most recent major acquisition was NetSuite for $9.3 billion in the second-half of 2016, which was its largest acquisition since it bought PeopleSoft for $10.3 billion in 2005. This will be the first full quarter that Oracle’s earnings include recent acquisition NetSuite’s results—which sells enterprise resource planning, or ERP, software. The acquisition could help Oracle strengthen its competitive position against other cloud-based companies like salesforce.com, inc. (NYSE: CRM).
Robert Weiler, the head of Oracle’s Global Business Units group, said in a recent interview with Fortune Magazine “we would only look for something that’s in the cloud,” when asked what he looks for in an acquisition.
Stacking Up Against The Competition
Competition in the tech sector shows no signs of slowing anytime soon among cloud-based and program-based companies like Salesforce and Oracle. The recurring subscription revenues and built in demand due to the need for continual upgrades with these products make them attractive areas for growth that companies will continue to invest in. But the more attractive the growth opportunity, the more attractive it is to the competition.
Oracle has made it very clear that Infrastructure as a Service, the cloud market that has so far been dominated by Amazon.com, Inc. (NASDAQ: AMZN) Web Services and Microsoft, is going to be a big focus for the company in the future. In 2016 at the Oracle OpenWorld conference, Oracle’s Chief Technology Officer Larry Ellison said: “Amazon is going to have serious competition going forward. And we are very proud of our second generation Infrastructure as a Service. We are going to be very aggressively focusing and aggressively featuring it. Not only at OpenWorld but for the rest of this fiscal year, and the next fiscal year and the year after that.”
The IaaS unit of Oracle’s cloud business only grew 6% in the last quarter compared to 81% growth in the company’s PaaS (Platform as a service), and SaaS (Software as a Service).
One of Oracle’s main competitors in cloud computing is Amazon Web Services, Amazon’s subsidiary that provides a suite of cloud computing services. Amazon Web Services reported $3.53 billion in revenue for Q4 2016, up 47% from Q4 2015. To put that into perspective, Amazon’s cloud business is more than three times larger than Oracle’s in their most recent quarters.
Can Oracle can keep up the rapid growth in its cloud business? The Q3 consensus earnings estimate from third-party Wall Street analysts is $0.62 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Revenue is projected to increase to $9.22 billion, from $9.01 billion in Q3 last year.
The options market has priced in an expected share price move of 3.2% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.
Calls have been active at the weekly 43 and 44 strikes while puts have seen activity at the 42 strike. The implied volatility sits at the 40th percentile. (Please remember past performance is no guarantee of future results.)
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
We’re not even close to the height of earnings season and there’s still over a month to go before earnings from Oracle’s main competitors like Microsoft, International Business Machines Corp. (NYSE: IBM) and Salesforce. While investors will be keeping a close eye on Oracle’s cloud growth in Q3, they’ll want to see how it stacks up to the competition. There’s a lot of big players focused on cloud computing and they have the resources to go after pretty much any attractive growth opportunity in the space. It could be a while before the dust settles and we see who the cloud computing leaders will be.
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