The Ratings Game: Oracle shares have worst day in four years, but analysts still love it

Oracle Corp. shares had their roughest day in more than four years Friday following the company’s earnings report, but that did little to dent analyst optimism ahead of the enterprise software giant’s OpenWorld conference in October.

Even though Oracle ORCL, -7.67%  topped Wall Street estimates for its fiscal first quarter late Thursday, a weaker-than-expected outlook for the second quarter kicked the legs out of Oracle’s recent string of record prices. Oracle was the worst performing stock on the S&P 500 index SPX, +0.18%  , dropping 7.7% to close at $48.74 with 65 million shares trading, well above the 52-week daily volume of 12.7 million shares. It was the worst one-day percentage drop for the stock since June 2013.

Don’t miss: Oracle outlook raises concerns about growth

Oracle’s forecast called for fiscal second-quarter earnings of 64 cents to 68 cents a share on revenue of $9.25 billion to $9.43 billion. Analysts surveyed by FactSet had estimated second-quarter earnings of 68 cents a share on revenue of $9.56 billion.

Many analysts disregarded the outlook and price drop and raised their price targets.

Stifel analyst Brad Reback, who has a “Buy” rating, raised his price target to $53 from $52, noting that Oracle planned to unveil a new log-analysis tool that could pose a challenge to data analysis company Splunk Inc. SPLK, -1.07%  

Reback said:

The next major catalyst for Oracle will be OpenWorld 2017, Oracle’s annual user conference that runs 10/1-10/5 in San Francisco, CA. In addition to the aforementioned new log analysis tool, Oracle highlighted it plans to unveil a new version of its cloud database service that will be fully autonomous. While we will hear a lot more details in less than a month, Oracle commented that this service relies heavily on machine learning and requires minimal human intervention to manage or tune the database. This will reduce costs, improve speed, and guarantee 99.995% uptime (less than 30 minutes of planned and unplanned downtime, annually). Oracle states it will be priced cheaper than [Amazon Web Services] and we look forward to hearing a lot more on product timing, availability, and pricing at OpenWorld.

Jefferies analyst John DiFucci, with a “Buy,” raised his price target to $61 from $60, but trimmed his full-year earnings estimate to $2.93 from $3.10 a share. He dismissed reaction to light second-quarter forecasts for cloud revenue as being a seasonal component.

“There will always be seasonally weak sequential Cloud revenue growth in F2Q,” DiFucci noted. “This has to do with the seasonality of bookings.”

He continued:

We thought this quarter’s results might force naysayers to notice and buy the stock, and while the Cloud guidance and EPS reduction might delay that, we believe patient investors will continue to be significantly rewarded. We’d be aggressive buyers on weakness, as we believe 2H Cloud revenue and F18 EPS estimates are now prudently conservative.

Cowen analyst J. Derrick Wood, with an “Outperform” rating, raised his price target to $57 from $55, noting that Oracle has made meaningful strides into the cloud after years of reluctance to make the move and endure shrinking margins.

We continue to see levers in the model that should favor ORCL over the next several quarters including 1) greater scale of its Cloud businesses leading to accelerating overall growth; and 2) incremental operating leverage as ORCL shifts to a lower cost and more efficient sales model. We also note that ORCL announced it has a new Machine Learning controlled database that will be hitting the market soon, which could be an interesting new product catalyst.

“The cloud growth guidance, even adjusting for currency, was a bit less than some hoped,” said Canaccord analyst Richard Davis in a note. With a “Buy” rating, Davis raised his price target to $57 from $56.

“Our view remains unchanged, which is that Oracle is a logical and relatively safer port in a storm that some fear will arrive,” Davis said.

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Of the 36 analysts that cover Oracle, 26 have “Overweight” or “Buy” ratings, 9 have “Hold” ratings, and one has a sell rating.

JMP analyst Patrick Walravens—in the minority of his fellow analysts with a “Market Perform” rating and no price target—said Oracle implied cloud revenue growth would also come in below expectations for the second quarter, at $1.53 billion to $1.58 billion compared with the consensus of $1.61 billion.

In a note, Walravens trimmed his full-year earnings estimate to $2.96 from $3.01 a share “in part because the F2Q18 guidance suggests that our prior cloud growth assumptions were too optimistic.” Analysts surveyed by FactSet, on , expect full-year earnings of $2.93 a share.