Oracle Misses Due to U.S. Dollar Strength; Shares Overvalued

In its first quarter with Cerner under its wing, Oracle (ORCL) beat the company’s high end of guidance on the top line (in constant currency terms), but due to strength in the U.S. dollar, non-GAAP EPS came in slightly under management’s guided range. While the outlook is healthy amid further currency headwinds to come, we continue to be more cautious on Oracle’s long-term potential. We are maintaining our fair value estimate for the narrow-moat stock at $67 per share. With shares up slightly after hours, near $78, this leaves the negative-trend company overvalued, in our view. Altogether, we believe that the market is overestimating the share Oracle can take of the database management market of the future—which we believe will pertain increasingly to nonrelational workloads outside of Oracle’s wheelhouse.

In the first quarter, revenue increased by 23% year over year in constant currency to $11.4 billion. Omitting Cerner’s impact on results, Oracle grew by 8% in constant currency—with strength in applications and its infrastructure cloud business. Cloud services and license support hit $8.4 billion, representing 20% year-over-year constant-currency growth. Cloud license and on-premises revenues grew by 19% year over year in constant currency to $0.9 billion. Non-GAAP EPS in the quarter was $1.03, which would have been 8 cents higher without the effect of a strengthening U.S. dollar.

Missing from Oracle’s commentary was mention of delays in decision-making due to the macroeconomic environment—which is context we have heard from other software companies over the last several weeks. In fact, we think Oracle could be benefiting in terms of delays in other vendors, as it could prolong the period customers stay on Oracle software if they are to eventually churn when reconsidering their best software vendors amid cloud migrations. However, in our view, such temporary boosts will have little effect on Oracle’s long-term health.