The stock got a slew of price target downgrades.
What a difference three months can make. After Oracle’s (NYSE:ORCL) first fiscal quarter earnings for the period ended August 31, analysts were “in shock” and “blown away” by Oracle’s growth outlook.
For fiscal Q2, ended November 30, it was a much different story for the cloud computing company. Oracle fell short of revenue estimates, and the stock got several price target downgrades, as analysts were concerned about “lackluster” Q2 results and its massive AI investments and debt.
Oracle stock tanked some 15% on Thursday following the release of earnings Wednesday after the market closed. Here are the key results.
- Revenue: $16.1B, up 14% year-over-year. This fell short of estimates of $16.2B.
- Net income: $3.1B, up 96% year-over-year.
- Earnings: $2.10 per share, up 91% year-over-year.
- Adjusted earnings: $2.26 per share, up 54% year-over-year. This beat estimates of $1.64 per share.
The reason the earnings were so high is because they include the proceeds from the sale of Oracle’s share in the chip company, Ampere. That sale netted the company about $2.7 billion. The gain was also included in the non-GAAP or adjusted earnings, which is why both were so high. Often, a one-time sale like that is excluded from adjusted earnings.
“Oracle sold Ampere because we no longer think it is strategic for us to continue designing, manufacturing and using our own chips in our cloud datacenters,” Oracle Chairman and CTO Larry Ellison said. “We are now committed to a policy of chip neutrality where we work closely with all our CPU and GPU suppliers … There are going to be a lot of changes in AI technology over the next few years, and we must remain agile in response to those changes.”
Cloud revenue beats estimates
While falling short of revenue estimates, Oracle still had solid growth. Cloud revenue, which accounts for about half of Oracle’s total revenue, was up 34% in the quarter, beating analysts’ expectations. Within that, cloud infrastructure revenue gained 68%.
On the downside, software revenue fell 3% year-over-year to $5.9 billion. This is the company’s traditional business of selling and licensing software for database management and other functions.
The outlook is also good, as Oracle has $523 billion in Remaining Performance Obligations, up 438%year-over-year. RPO is essentially work in the pipeline that has yet to be paid. That’s up 15% from the previous quarter and is highlighted by new commitments from Meta and Nvidia, among others.
On the earnings call, Doug Kehring, principal financial officer, said revenue is slated to grow 19% to 21% in fiscal Q3 with cloud revenue expected to grow from 40% to 44%. Further, full year revenue remains targeted at $67 billion, while fiscal 2027 is anticipated to generate $4 billion of additional revenue.
Concerns about debt, OpenAI, valuation
While the outlook and pipeline looks promising, Oracle’s target price was downgraded by several analysts after earnings.
Stifel lowered the price target from $355 per share to $275, citing the lackluster earnings, reported the Fly. The improved RPO growth was offset by concerns over its rising cap expenditures and how it will fund certain projects.
BMO Capital lowered it to $270 per share, from $350 per share on its lower-than-expected revenue. BMO, along with other analysts, cited concerns about its reliance on OpenAI, specifically its $300 billion cloud contract as part of the $500 billion Stargate project to build out data centers. The worry is that OpenAI won’t have enough revenue to fund the Oracle deal, based on its projected 2025 revenue.
In addition, Oracle has tons of debt, about $124 billion, according to Yahoo Finance, as it plunges money into its AI capabilities. It’s debt-to-equity ratio is a sky-high 408% and its current ratio is below 1 at 0.91, which indicates its liabilities are greater than its assets.
On top of that, Oracle is trading at 56 times earnings, which is very high.
Analysts are still bullish on the stock, as Oracle has a median price target of $336 per share, which suggests 76% upside. Thursday’s selloff could be a buying opportunity for some, but investors may want to do a deeper dive or perhaps wait for a lower entry point as this seems to be a rocky time for AI stocks.
