Oracle Earnings: IaaS Signings More Than Make Up for Miss

Key Morningstar Metrics for Oracle

• Fair Value Estimate: $98.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Oracle’s Earnings

Oracle ORCL missed consensus expectations on its top and bottom lines during its fiscal fourth quarter. Despite this, the firm’s remaining performance obligations increased by 44% (which amounted to $98 billion), largely due to its growing infrastructure as a service business.

We previously expected Oracle’s potential in the hyperscaler sphere to be dramatically capped, due to what we saw as more niche attributes stemming from its roots in all things relational. However, we now think the firm’s lower IaaS pricing will bring in additional, broader workloads, which will positively affect margins. As a result, we’ve raised our fair value estimate for the stock to $98 per share from $84. However, with shares up by over 20% in the year to date, we still firmly believe they are overvalued.

We reiterate that Oracle is a moaty, sticky company, but still think switching costs are vulnerable in its core enterprise resource planning and database markets, as enterprises shift workloads to the cloud, causing reflection on how to best meet their software needs. Our more optimistic take on the potential for Oracle’s IaaS business will help moderate the impact of such eroding switching costs on the top and bottom lines.

Non-GAAP earnings per share was $1.63, while revenue increased by 3% year over year to $14.3 billion. Cloud services and license support, which make up the greatest portion of revenue, increased 9% year over year to $10.2 billion. However, as software migration to the cloud is still well underway, the firm’s cloud license and on-premises license revenue declined by 15% year over year.