The Oracle miracle: The reason behind the stock rally
June 22 2022 - Team Stockal
While the tech stocks are seen struggling amid high inflation and rising interest rates, software giant Oracle Corporation (ORCL) offered investors a ray of hope with its market-beating quarterly results. In addition, the board of directors declared a quarterly cash dividend of $0.32 per share.
Oracle’s growth boosted by the cloud boom
Oracle Chief Executive Officer Safra Catz attributed the robust results to an increase in demand for cloud infrastructure. She said, “We believe that this revenue growth spike indicates that our infrastructure business has now entered a hyper-growth phase.”
Exhibit 1: Oracle revenue mix for the fiscal year 2022
Source: Company Financials, June 2022
Cloud business forms the most significant chunk of Oracle’s total revenue mix. In the last quarter, Oracle’s cloud and on-premise license business saw the highest revenue growth of 25% in constant currency, generating $2.54 billion in revenue. The company’s cloud services and license support segment posted revenue of $7.61 billion – up 7% in constant currency from last year.
TikTok moves U.S. users’ information to Oracle servers
In a win for Oracle’s cloud business, TikTok recently completed migrating its U.S. users’ data to Oracle’s cloud platform. The move came in after U.S. officials raised concerns over data protection and risks to national security due to TikTok’s Chinese ties. Now, 100% of U.S. user traffic will be hosted by Oracle servers.
Oracle sees double-digit revenue growth ahead
Despite rising inflation, Oracle expects robust revenue growth in its cloud business. However, it cautioned of a $100 million hit per quarter in the fiscal year 2023 due to the suspension of services in Russia. For the quarter ending August, Oracle sees overall revenue growth in the range of 17% to 18%. In the same quarter, the company expects adjusted earnings of $1.04-$1.08 per share, compared with analysts’ estimate of $1.13 per share.
Is Oracle stock cheap enough to buy?
After reporting strong results and providing a positive outlook, Oracle shares rallied and ended the week higher despite massive corrections in the overall market. However, the stock is still cheap at 23% down this year.
As per Deutsche Bank analyst, Brad Zelnick, Oracle is currently trading at a forward price to earnings ratio of 12.69 – less than half of Microsoft’s valuation. He adds that inflation might be good for Oracle due to inflation-index-linked increases built into Oracle’s customer contracts. Moreover, customers might show little resistance to price hikes because of high switching costs for Oracle software.
Exhibit 2: Comparison of Oracle stock performance this year with benchmark indices and peers
Data as of the last close on 17 June 2022
Cloud computing is that one pandemic trend that is here to stay and continues to thrive as more and more enterprises move to cloud computing. Instead of retracting, the demand for cloud services has shown consistent growth even during a tumultuous macroeconomic environment. This makes for a strong case for Oracle stock, especially when investors are looking for high-growth, profit-making tech stocks.