Oracle stock at $100: Should value investors ignore analysts’ warnings?

Enterprise software specialist Oracle (NYSE: ORCL) isn’t among the “Magnificent Seven” technology giants of 2023. Yet, until Dec. 12, Oracle stock looked poised to end the year with a magnificent rally.

ORCL stock plunged 12% on Tuesday, even while the major stock-market indexes remained firmly in the green. Clearly, the day’s Consumer Price Index (CPI) print wasn’t the negative catalyst that put Oracle’s investors in a sour mood.

As the stock rapidly declined, value seekers may have wondered whether it may now be a prime bargain for the picking. However, before backing up the truck and loading up on shares, investors should consider the commentary of prominent analysts who evidently see major red flags with Oracle.

Another quarterly beat for Oracle

To recap, Oracle’s primary business niche is cloud-computing software and services. The company’s most notable product is Oracle Cloud Infrastructure, which competes with Amazon’s (NASDAQ: AMZN) Amazon Web Services (AWS), Microsoft’s (NASDAQ: MSFT) Azure and Alphabet’s (NASDAQ: GOOGL) (NASDAQ: GOOG) Google Cloud.

In addition, Oracle is in the process of acquiring Cerner, an electronic health-records business. There’s still a cloud connection there though.

According to Oracle Chairman Larry Ellison, the Cerner acquisition means Oracle will “provide our overworked medical professionals with a new generation of easier-to-use digital tools that enable access to information via a hands-free voice interface to secure cloud applications.”

In other words, most of Oracle’s business operations involve cloud computing in one way or another. This means the company will have to compete against “Magnificent Seven” behemoths like Amazon, Microsoft and Alphabet. That’s certainly not an easy task.

Amid this challenging backdrop, Oracle actually managed to post an earnings beat for the second quarter of fiscal 2024. On an adjusted, non-GAAP-measured basis, Oracle earned $1.34 per share, versus Wall Street’s call for $1.33 per share. That’s not a huge beat, but it cements the company’s healthy track record of quarterly earnings beats.

Since this has been the year that artificial intelligence (AI) consumed investors’ attention, it’s not too surprising that Oracle CEO Safra Catz mentioned generative AI in the company’s quarterly press release.

“Demand for our Cloud Infrastructure and Generative AI services is increasing at an astronomical rate… As a measure of that demand, Oracle’s total Remaining Performance Obligations (RPO) climbed to over $65 billion — exceeding annual revenue,” Catz boasted. “Business is good and getting better.”

That’s a matter of opinion though, and evidently the investing community disagrees with Catz’s optimistic assessment. Again, the single-day 12% drop in ORCL stock speaks volumes.

During Q2 FY2024, Oracle generated net revenue of $12.9 billion, falling short of the analysts’ consensus estimate of $13.1 billion. Furthermore, Oracle’s quarterly overall cloud revenue totaled $4.8 billion, up 25% year over year. This might sound impressive, but it’s a slowdown compared to the prior quarter’s 29% year-over-year revenue growth.

Analysts are concerned, so let the chips fall where they may

Slowing revenue growth isn’t the only concern. There may also be some friction in Oracle’s takeover of Cerner’s assets.

“We believe HSD [high single digit percentage] growth for the company may prove unsustainable with Cerner integration headwinds and increasing competition in the datacenter market,” D.A. Davidson analyst Gil Luria explained.

During the recent quarterly conference call, Ellison attempted to quell investors’ concerns about the Cerner integration. Cerner’s products are “very quickly moving from a license basis to a subscription basis,” Ellison assured investors.

Meanwhile, William Blair analyst Sebastien Naji expressed concern that ORCL stock may have gotten ahead of itself (prior to the 12% cliff dive, of course). Thus, Naji feels that “the stock is already embedding expectations for revenue acceleration and generative AI tailwinds.”

However, the most pressing of all the concerns seems to be Oracle’s slowing cloud-revenue growth.

UBS (NYSE:UBS) analyst Karl Keirstead summed up the market’s angst, warning, “For the second straight quarter, Oracle didn’t meet Cloud/OCI growth expectations and again pinned the blame on the pace of infrastructure capacity build-outs, which is disappointing and tough to get visibility into.”

In other words, there’s uncertainty about how Oracle can get its cloud-revenue growth back on track. That’s a problem because the market loves clarity and hates uncertainty.

Consequently, ORCL stock at or near $100 isn’t necessarily a great value. A stock is only worth whatever the market feels that it’s worth, and the market may choose to punish Oracle for a while longer due to the lack of “visibility” (to borrow Keirstead’s word).

Therefore, while it’s fine to keep Oracle on your watch list for further updates, it’s probably not a great idea to take a large share position in the company now.