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Shares of Oracle Corp. tumbled Tuesday after disappointing quarterly results, particularly in its cloud-software business, prompted some Wall Street analysts to abandon their bullish views.
Oracle ORCL, -9.43% stock fell 9.0% in afternoon trade, and was by far the biggest percentage decliner in the S&P 500 index SPX, +0.15% Oracle shares were on pace to post their largest single-day percentage decline since June 2013. The stock has dropped 11% since it closed at a record $52.97 on March 9.
Late Monday, the business-software company reported a fiscal third-quarter profit that beat expectations but sales that missed slightly amid disappointing growth and a downbeat outlook for its fast-growing cloud business. Tuesday morning, at least two analysts downgraded the stock, and at least four analysts reduced their target prices on the stock, according to FactSet, while two analysts increased their targets.
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Analyst Monika Garg at KeyBanc Capital downgraded Oracle to sector weight, after being at overweight since July 2017, citing the slower-than-expected transition to the cloud.
“Oracle’s transition to the cloud was a major factor in our July 2017 upgrade, but is taking much longer to play out,” Garg wrote in a note to clients. She said execution risk in the cloud has now increased, as larger cloud competitors, such as Microsoft Corp. MSFT, +0.26% Salesforce.com CRM, +0.11% and Amazon.com Inc.’s AMZN, +2.69% Amazon Web Services, are growing faster.
Stifel Nicolaus analyst Brad Reback cut his rating to hold, after being at buy since at least June 2015, saying the “lackluster” cloud results and outlook is especially concerning given the strong results posted by its cloud rivals.
Reback said that Oracle’s profit beat was largely driven by a lower-than-expected tax rate of 16%, compared with previous guidance of 24%. He also noted that share repurchase activity, which can help increase earnings per share, ballooned to $3.97 billion from $1.95 billion in the sequential second quarter.
“We find the lackluster results/guidance concerning, especially in contrast to the strong results posted by Microsoft, Salesforce.com, Adobe ADBE, +3.41% , Workday WDAY, +1.12% , ServiceNow NOW, +1.35% , Splunk SPLK, +2.98% , Nutanix NTNX, +1.60% , etc., driven by one of the best software spending environments we have seen since picking up coverage of the space in 2001,” Reback wrote in a research note to clients that was titled “Where’s The Beef?”
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BMO Capital Markets analyst Keith Bachman kept his outperform rating intact, but cut his price target to $53 from $55. He noted that new software licenses declined by 6% in the quarter, a steeper decline than the previous quarter, and sees further weakness ahead.
“We believe new software license agreements and renewals from bring your own license (BYOL) and the launch of autonomous database will likely take time to offset declines in application licenses,” he wrote. He predicts that new software licenses will decline by 9% or 10% in the current quarter and about 8% in the 2019 fiscal year, which ends next May.
Instinet’s Christopher Eberle, whose $64 price target makes him the biggest bull on Oracle stock, of the 34 analysts surveyed by FactSet, said that bears might be misinterpreting the deceleration in cloud revenue. He wrote that the BYOL program means that some of that revenue is considered license revenue, while another part is considered cloud revenue. Before BYOL, he said, all revenue was considered cloud revenue if a client moved their database to Oracle’s cloud.
“We believe it’s a bit more complicated than headline numbers as there are a number of moving parts underneath the covers and, if you look closely, significant progress is being made in this historic business model transition,” he concluded.
Oracle shares are up 4.7% over the past 12 months, while the S&P 500 has gained 14.6%. None of the analysts tracked by FactSet have a sell rating on Oracle stock, with 22 rating the shares the equivalent of buy and the rest rating them the equivalent of hold.