Oracle shares climbed by as much as 2.33% to $38.17 per share today after Goldman Sachs analysts upped their price target for the stock from $45 to $47 per share and added it to their Conviction Buy list. They note that the stock had fallen by 17% year to date (prior to today’s gains) compared to the S&P 500 Index’s 2% decline in the same period.
Investors remain skeptical on Oracle
Investors have been particularly worried about whether Oracle can successfully transition to being a cloud company and how this move will impact its financials. In a report dated Nov. 16, analyst Heather Bellini and her team said they think investors are especially worried about the company’s cloud revenue for fiscal 2016, which ends in May.
Oracle management guided for 50% revenue growth for the cloud segment and targets a gross margin of 60% for it, which they believe investors are skeptical about. Oracle also is targeting bookings of between $1.5 billion and $2 billion.
Oracle’s cloud shift going well
Bellini said her team’s checks indicate that the company’s cloud revenue will indeed accelerate in the second half of fiscal 2016. She expects this acceleration to result in expansion of Oracle’s multiple because investors will start becoming more confident on management’s ability to execute on their promises.
The Goldman Sachs analyst sees this thesis as evolving over the next three quarters and expects the first bit of evidence to be mad clear in the earnings report for Oracle’s second fiscal quarter of 2016, which is due in the middle of next month. Bellini expects guidance to show that the company is winding down its promotional pricing and that customers are renewing their subscriptions at higher accounting rates of return.
Oracle’s multiple to expand
She further notes that investors may remain concerned in the near term due to inconsistency in execution, but she believes this will pass and that as investors start to see proof that management’s plan is working, the company will earn a higher multiple. She adds that if Oracle can achieve its bookings targets for fiscal 2016, then she would expect management to guide for an acceleration in cloud revenue growth in fiscal 2017 with expanding margins. Her team’s work thus far is giving her “growing confidence” that Oracle can indeed hit the targets set by management.
Bellini also believes that fiscal 2016 will set the bottom in operating margins on a non-GAAP basis. She notes that consensus estimates for Oracle’s non-GAAP earnings per share for fiscal 2016 have been falling over the last four quarters as the cloud transition pressures the company’s earnings.
