Chicago, IL – November 29, 2024 – Zacks.com announces the list of stocks and featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include including Oracle ORCL, Amazon AMZN, Microsoft MSFT and Alphabet GOOGL.
Here are highlights from Friday’s Analyst Blog:
Is Oracle a Buy, Sell or Hold at a P/S Multiple of 8.61x?
While Oracle has been a standout performer with a 52.9% gain over the past six-month period, significantly outpacing both the Zacks Computer and Technology sector and S&P 500's modest growth of 8.1% and 13.1%, respectively, this impressive run-up has pushed valuations to a concerning level.
Trading at an elevated price-to-sales multiple of 8.61X compared with the Zacks Computer-Software industry’s 8.02X, the stock appears to have gotten ahead of its fundamental growth prospects.
The enterprise software giant's rich valuation metrics suggest investors are pricing in overly optimistic growth expectations, despite mounting challenges in the competitive cloud computing landscape. This premium valuation leaves little room for error and creates substantial downside risk for current shareholders.
The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $58.02 billion, suggesting 9.55% year-over-year growth. The Zacks Consensus Estimate for earnings is pinned at $6.20 per share, indicating an increase of 11.51% year over year. These growth rates hardly justify the current rich valuation. The marginal 0.2% increase in earnings estimates over the past 60 days suggests limited upside potential from current levels.
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Cloud Growth: Concerning Deceleration
Despite management's optimistic tone about cloud performance, with total cloud revenues up 22% to $5.6 billion, concerning patterns emerge. The Infrastructure-as-a-Service revenue growth of 46% represents a significant deceleration from the 64% growth reported last year. This slowdown raises questions about Oracle's ability to maintain momentum in the highly competitive cloud market, especially against established leaders.
Capital Intensity Raises Red Flags
The company's announcement of doubling fiscal 2025 CapEx compared to 2024 is particularly concerning. With first-quarter CapEx already at $2.3 billion and plans for massive data center expansions, including facilities exceeding a gigawatt, Oracle is betting heavily on infrastructure buildout. This aggressive spending could pressure margins and free cash flow, especially if cloud adoption rates don't meet expectations.
Multi-Cloud Strategy Creates Hidden Risks
While Oracle touts its new partnership with Amazon -owned Amazon Web Services, joining existing relationships with Microsoft Azure and Alphabet -owned Google Cloud, this multi-cloud approach might signal weakness. The strategy could be interpreted as an admission that Oracle's cloud infrastructure isn't winning enough standalone business, forcing the company to piggyback on more successful platforms.
Financial Performance Concerns
Though the first quarter showed some positive metrics, including operating income growth of 14% and an operating margin of 43%, the company's reliance on accounting changes to boost results is troubling. The extension of estimated server lives from five to six years reduced first-quarter operating expenses by $197 million, artificially inflating profitability metrics.
Debt and Cash Flow Considerations
With only $11 billion in cash and marketable securities, Oracle's aggressive capital expenditure plans could strain its balance sheet. While operating cash flow for the first quarter was $7.4 billion, the intensive capital requirements for data center expansion could significantly impact free cash flow going forward.
Risk Factors to Monitor
Key risks include potential further deceleration in cloud growth rates, margin pressure from aggressive infrastructure investments and execution risks in the multi-cloud strategy. The company's heavy capital expenditure plans could also pressure financial flexibility if cloud adoption rates don't meet expectations.
While Oracle's strategic initiatives show promise, the current valuation of 8.61X sales appears unsustainable given the company's actual growth rates and capital requirements. Investors would be better served waiting for a more attractive entry point, ideally when the P/S multiple approaches a more reasonable level that better reflects the company's growth profile and competitive challenges in the cloud market.
Conclusion
Given Oracle's rich valuation multiple, decelerating growth rates in key segments, and massive capital expenditure commitments, investors should consider reducing positions or exiting entirely. The current price level appears to price in an overly optimistic scenario while ignoring significant risks and capital requirements. Oracle currently has a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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