Market Buys Oracle CEO's Prediction, but Analysts Don't

The market may want to believe him, but Wall Street analysts were having a hard time swallowing Oracle(ORCL) CEO Larry Ellison's projection Tuesday that his company can achieve 50% operating margins.

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Oracle's stock was up $1.25, or 9%, at $15.05 after Ellison told analysts and reporters that his firm can achieve 50% operating margins when the economy picks up again.

The comments came during the company's OpenWorld users conference, where Ellison also said his business had stabilized, and that he expected growth to come in 2002, when he said the current recession would end.

But while investors were bidding up the stock on his comments, analysts familiar with Ellison's shoot-from-the-hip style were putting less faith in his comments -- not without reason. Oracle said in September its operating margin came in at 33% during the first fiscal quarter, which ended in August. Before Tuesday, Oracle's goal was to hit 40% margins.

"We think most people will take this comment with the usual grain of salt necessary for digesting all Ellison proclamations," wrote CIBC World Markets' Melissa Eisenstat, referring to the 50% margins target. If it happens, she said, it won't happen soon. "We think that sometime in the next several years (i.e. FY 2004-05), fourth quarter operating margin, which is traditionally (Oracle's) strongest quarter, could hit 50%.

However, we do not think this is likely to happen in the short term, even when the economy finally begins to recover." (Eisenstat has a buy rating on Oracle, and her firm hasn't done underwriting for the company.)

Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray, said Oracle would have to pull off quite a trick to achieve 50% margins.

"He's got a long way to go," said Ekoniak, who has a neutral rating on Oracle, during an interview. "It seems like operating margins have topped out in the near term. To grow the business at a respectable rate and increase operating margins, he's going to have to pull off a major feat of magic." (His firm hasn't done underwriting for Oracle.)

RBC Capital Markets analyst Cameron Steele put things more delicately in a research note.

Steele simply wrote, "We continue to believe our current estimates are reasonable, and our operating margin assumptions to be realistic." (Steele has a buy rating on Oracle, and RBC hasn't done underwriting for the company.)

Thomas Weisel Partners analyst Robert J. Schwartz was more direct. While he didn't directly contradict Ellison, he titled his own note: "CEO's Call for 50% Margins Unsupported."

"We note the highest operating margin achieved in any quarter (at Oracle) is 41% (4QFY00). The highest operating margin in a full fiscal year is 35% (FY01). While our model shows operating margins expanding to 39% in FY03, we don't see any near-term fundamental catalysts that could allow Oracle to meet the 50% target." He has a market perform rating on Oracle, and his firm hasn't done underwriting for the company.

And even Merrill Lynch, which helped take Oracle public in 1986 and underwrote another offering for the firm in 1997, was skeptical.

Analyst Chris Shilakes, who has an accumulate/buy rating on the firm, said it would be "quite difficult for ORCL to reach this margin."

However, from the reaction of the stock Wednesday, the market obviously wanted to believe Ellison, even if those who listen to him most couldn't.

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