Oracle’s Q4 Beats Expectations but Outlook Doesn’t Surprise; Shares Fairly Valued

Oracle’s (ORCL) fourth quarter was rosier than expected with earnings per share exceeding the high end of management’s guidance, as customer cloud consumption revenue growth grew at a robust pace, exceeding 100%. Nonetheless, the outlook was not a surprise—leading to only moderate long-term forecast boosts as a result, on our end. While also considering the time value of money from rolling our model, we are increasing our fair value estimate for the narrow-moat stock to $67 from $63 per share. This leaves the negative-trend company fairly valued, with shares trading near $73 in after hours.

Earnings per share exceeded management’s high end of guidance by $0.20 in Oracle’s fourth quarter, while revenue increased by 5% year over year to $11.8 billion. Cloud license and on-premises revenue grew 18% year over year in the quarter to $2.5 billion. Cloud services and license support, however, contributed a heftier chunk of revenue, hitting $7.6 billion, though this is the result of much more moderate 3% year-over-year growth. We think the most impressive figure from earnings was word of cloud customer consumption revenue increasing by 108%, showing promise for already converted cloud customers. This is in line with our thesis that for legacy software vendors like Oracle and SAP, we believe strong switching costs would be restored once customers adopt their respective cloud solutions. However, we are most concerned about the period in which enterprises are reassessing their software vendor options ahead of their cloud migrations—and this is why we give Oracle a negative moat trend, as well as view the stock more bearish than FactSet consensus (though we are in range of market value).

Outlook for the first quarter includes revenue growth of 18% and adjusted earnings per share of $1.06, both at the midpoint.