Oracle Fiscal Q2 Earnings Tops Expectations, Stock Overvalued

Oracle Stock at a Glance

• Current Morningstar Fair Value Estimate: $67
• Oracle Stock Star Rating: 2 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Negative

Oracle Earnings Update

Oracle’s (ORCL) fiscal second-quarter results surpassed our expectations thanks to outperformance from Cerner and strength in infrastructure and applications. While the outlook for the next quarter was healthy, currency headwinds don’t appear to be subsiding anytime soon—and Oracle will undergo elevated capital expenditure over the next few quarters to further build out cloud regions amid ongoing demand. As a result, we are maintaining our fair value estimate at $67 per share. With shares up around 2% after hours, near $83, we think the narrow-moat negative-trend company is overvalued. We continue to believe that absolute growth and margin expansion are in the cards for Oracle over the next five years. However, we think that the market is overestimating the extent of such growth given increasingly competitive forces as customer churn becomes a significant risk as enterprises transition workloads to the cloud.

In the second quarter, revenue increased by 25% year over year in constant currency to $12.3 billion—surpassing management’s guidance of 22% constant-currency year-over-year growth. Recently acquired Cerner accounted for $1.5 billion of total revenue. A key driver was Oracle’s infrastructure and applications cloud business, which grew by 59% and 45%, respectively, year over year in constant currency. Overall, cloud services and license support hit $8.6 billion, representing 20% year-over-year constant-currency growth. Cloud license and on-premises revenue grew by 23% year over year in constant currency to $1.5 billion. On the margin front, infrastructure as a service, or IaaS, margin improved in the quarter, and is expected to continue to expand. The IaaS segment improvement helped Oracle achieve a 41% non-GAAP operating margin. Non-GAAP EPS in the quarter was $1.21, which was above the guided midpoint of $1.18 per share, even after factoring in a 9-cent headwind due to the strengthening U.S. dollar.