Oracle's Cloud: How This Will Effect Tomorrow Earnings

Oracle (NYSE:ORCL) is releasing its May quarter (fiscal Q3) earnings after the bell tomorrow. Analysts are estimating an all-time high EPS of $1.07 a share along with sales of $10.95 billion, representing growth of 8% and negative 2.7% respectively. ORCL has dropped on the last 7 consecutive earnings releases even after reporting beats on both top and bottom-lines.

Restructuring

Oracle is in the midst of restructuring its business model from an on-premise software licensing company to a one that is focused on cloud-based subscriptions and services. This transition has been done almost entirely inorganically through a frenzy of acquisitions. Oracle acquired 9 different companies last year, with a total of 53 acquisitions since 2012, all projected to advance its cloud product offering. The cost of this business model upheaval has diminished the firm’s top-line growth in the short term but is expected to post increasingly robust financials as the businesses acclimate and synergies are leveraged.

This is a smart move for Oracle, in the long run, to transition away from their archaic on-premise software business model. Cloud software delivery is much more efficient and less costly than the older model. More and more businesses are using cloud-based software and Oracle needs to hold its current market position amid its transition to have a fighting chance of leaving a footprint in this overly competitive space.

Subscription based cloud services are extremely lucrative revenue streams that provide reoccurring sales indefinitely if the product offering satisfies the consumer’s needs. If Oracle is able to to expand this model successfully, I believe that ORCL could see some large upsides to come.

Key competitors include Adobe (NASDAQ:ADBE) , Microsoft (NASDAQ:MSFT) , and Salesforce (NYSE:CRM) , which are all growing at a significantly faster rate than Oracle. ORCL needs to quickly get its act together if it’s going to stay competitive in this space. ORCL has far underperformed these competitors when examining its 5-year performance but is in the middle of the pack for 52-week and year-to-date performance.

Valuation

Oracle’s poor performance compared to its competitors is reflected in its discounted valuation. ORCL is trading at a forward P/E of 13.9x considerably less than the computer software industry which is being valued at an average P/E of 27.5x.

ORCL is being valued considerably below the industry on every valuation multiple but that does not mean that this stock is a value buy. This is only an indication of low growth in an industry where growth is almost synonymous with cloud computing.

Adobe Earnings Release

Adobe, one of Oracle’s key competitors, released earnings this afternoon and wowed investors posting the strongest results since the company’s inception. Adobe illustrated 25% top-line growth driven primarily by its cloud-based subscriptions. ADBE is up over 2.5% in after-hours trading. This could be a sneak peek into what to expect from ORCL tomorrow with its other key competitors also beating both top and bottom-line estimates.

Take Away

Cloud tech has been performing better than expected this year but this is not indicative of strong performance by Oracle who has consistently lagged behind the category. Look for big growth numbers in its revenue segment “Cloud services and license support” which is expected to drive Oracle’s sales moving forward.

Oracle is still in a restructuring phase with its massive number of acquisitions just beginning to integrate into Oracle’s operations. Look for restructuring costs to be decreasing as this process finalizes and hopefully shifts Oracle’s top-line back into robust growth on pace with its peers.

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