Oracle's earnings were through the roof — so analysts can't agree on why the stock is down 10% (ORCL)

Larry Ellison Safra Catz

Oracle's shares dipped almost 10% on Tuesday following mixed quarterly earnings at the $216 billion company.
Analysts disagreed about what exactly caused the sell-off, in a quarter where Oracle was more or less flat on revenue, and far above expectations on earnings per share.
A review of seven analyst notes shows some consensus: most analysts still see the stock as one to buy.
But possible reasons include slowing cloud growth, or disappointing revenue guidance for the next quarter.

Oracle shares were down nearly 10% on Tuesday — the day after the $216 billion database giant posted what appeared to be a solid third quarter earnings report.

The company reported revenue of $9.77 billion for the quarter, which was just shy of analysts' consensus of $9.78 billion. The company also beat on adjusted earnings per share, reporting $0.83 versus the analyst estimate of $0.72.

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We reviewed seven Wall Street analyst notes on Oracle, released post-earnings. All of them maintained their performance rating for the stock. Six of those notes showed positive ratings for Oracle, while one of them — Oppenheimer — was more neutral.

The thing they all had in common: None of them were put off by Oracle's earnings, revenue miss and all. However, they were well aware of the stock swing, which started in after hours trading on Monday.

The analysts didn't always agree about what was causing Wall Street to think twice about Oracle. But a few things stood out across all of the analysts notes. Here's what they say could be going on.

Oracle was close on revenue but missed on key areas like cloud

One theory that analysts have is that while Oracle was pretty close to its revenue target, it missed the mark on specific growth areas.

Oracle pointed to a 32% annual growth in its cloud business as a sign that it was making gains in an market that many see as key to the future success of the company. But analysts have differing opinions about whether that number truly represents how Oracle's cloud business is really performing.

larry ellison

Richard Davis at Canaccord Genuity found that Oracle's 32% growth figure was on a GAAP basis — and that non-GAAP cloud revenue grew by just 25%, only moderately beating the 24% cloud growth that Wall Street was hoping to see. Cowen's J. Derrick Wood, however, found cloud growth was just 22% in constant currency, which would mean a whiff on that expected figure.

And in general, investors could be fearful that whatever cloud growth Oracle is seeing could be slowing down.

"Oracle’s slowing cloud trend is similar to last quarter and indicates the cloud model transition is taking longer than expected," wrote Brian Schwartz, an analyst at Oppenheimer." Bottom line: Another quarter of soft results reinforces our opinion that Oracle's story lacks excitement..."

Wood also noted that Oracle missed on software licenses, which declined 6% in constant currency, while analysts expected a decline of 2%.

For Barclays, which maintained its $60 price target for Oracle, the slowing growth had a silver lining. Negative earnings revisions — when investors sell off in response to bad news at a company — are becoming less impactful on the overall health of Oracle stock.

"Fair, we thought that the better macro and positive channel checks would result in better than reported Q3 results. SaaS and licenses were a little weaker than consensus." wrote Barclays' Raimo Lenschow. "But the magnitude of the negative revisions are getting smaller, suggesting that we are close to finding the correct level for the underlying operational performance."

Annual guidance disappointed traders, who wanted bigger gains

On the earnings call, Oracle co-CEO Safra Catz told analysts that Oracle expects to report between $0.92 and $0.95 in earnings per share for the next quarter, which beat analyst expectations of $0.90.

But she said Oracle expects to grow its revenue by 1% to 3% in the fourth quarter, which would put it between $11 billion and $11.1 billion. This was a disappointment for Wall Street, which expected revenue guidance closer to $11.21 billion for the fourth quarter.

Alex J. Zukin at Piper Jeffray attributed the share selloff to disappointment with this guidance, but said Piper Jeffray remains "confident that SaaS revenues are set to accelerate" in fiscal year 2019, thanks to Oracle's other offerings.

Davis at Canaccord similarly attributed the selloff to guidance for the fourth quarter, despite Oracle's earnings being "in line with" his firm's expectations.

"After-hours traders were a bit more skeptical...presumably reflecting the reality that despite some segments that are growing 50%, overall revenue is growing 5% this year," Davis wrote. .

Schwartz at Oppenheimer, the one analyst firm to maintain a neutral position on the stock, said that Oracle's guidance is particularly disappointing because the rest of the software industry is doing well right now.

"Negatively, the results are a disappointment because the targets were lower than at the fiscal-year start while the fundamental backdrop for the software industry has strengthened, "wrote Schwartz.

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