ii view: software giant Oracle misses forecasts

Third-quarter results to 28 February  

• Revenue up 6% to $14.13 billion
• Adjusted earnings up 4% to $1.47 per share
• Quarterly dividend up 25% to $0.50 per share

Chairman Larry Ellison said:

“We are on schedule to double our data centre capacity this calendar year. Customer demand is at record levels. We are connecting OpenAI ChatGPT, xAI Grok and Meta Llama directly to Version 23ai of the Oracle Database with advanced vector capabilities.”

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ii round-up:

Database software and cloud data hosting provider Oracle Corp (NYSE:ORCL) detailed sales and earnings forecasts that missed high Wall Street expectations.

The Texas headquartered company expects growth in fourth-quarter sales of up to 10% to $15.6 billion, taking earnings as high as $1.65 per share. Driven by cloud-datacentre demand for AI software hosting, Wall Street was predicting growth in sales of 11%, taking earnings to $1.79 per share. 

Shares in the S&P 500 company fell 4% in post results trading having come into this latest news up around 13% over the last year. That’s ahead of a 9% loss for fellow cloud data hosting provider Microsoft Corp (NASDAQ:MSFT). The S&P 500 index is up almost 8% over that time.

Oracle sells database software and hardware to datacentre providers and companies across the world, as well as having more than 160 of its own datacentres in operation or under construction.

Second-quarter cloud infrastructure related revenues to late February climbed 49% year-over-year to $2.7 billion, driving total group-wide revenues up 6% to $14.13 billion. Adjusted earnings improved 4% to $1.47 per share. 

In January, Donald Trump announced plans to invest billions of dollars in AI infrastructure in the US in collaboration with Oracle, OpenAI and SoftBank. The first initiative of the joint venture, called Stargate, will be to construct data centres in Texas where work has already begun. 

Capital expenditure for this financial year is expected to total around $16 billion, just over double that spent last year. A proposed quarterly dividend of $0.50 per share is up 25% from the prior second quarter. 

ii view:

Started in 1977, Oracle today serves over 400,000 customers including companies such as Airbus SE (EURONEXT:AIR), Deutsche Bank AG (XETRA:DBK) and Flutter Entertainment (LSE:FLTR). Pioneering the first Structured Query Language (SQL) database, Oracle has grown both organically and via more than 150 acquisitions costing around $110 billion. Geographically, the US accounted for 55% revenues during its last financial year, with the UK, Germany and Japan all notable at around 3-to-4%. 

For investors, the tough economic backdrop will be heightening customer desire to obtain value for money. Costs generally for businesses remain elevated. A forecast dividend yield of around 1.1% sits below the 2.7% yield forecast for rival IBM, while a prospective price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. 

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On the upside, the broad corporate drive toward using AI in conjunction with their databases is likely to offer continued demand support for Oracle services. A partnership with the US government is now underway. A wide diversity of both customer types and geographical location exists, while growth by acquisition over time has been successfully achieved. 

For now, and despite the ongoing difficulty in valuing growth businesses, a consensus analyst estimate of fair value at $194 per share does appear to offer grounds for continued cautious optimism.   

Positives: 

• Product and customer sector diversity
• Own investment programme

Negatives:

• Acquisitions come with risk
• Currency moves can impact

The average rating of stock market analysts:

Buy