This year is looking up for enterprise software giant Oracle (ORCL) , in stark contrast to last year when its stock shed nearly 19%

If the company's fiscal fourth-quarter earnings release on Thursday shows strong results, the company's stock price should jump. Oracle is one of the best moneymaking bets in this overvalued broader market.

But investors wonder if strong earnings would be enough to help the company ride out its legal storm. Oracle has been entangled in several legal hassles that pose a constant threat to its reputation. 

For starters, the company recently lost a bitter patent fight with Alphabet's Google. 

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In addition, Oracle is a defendant facing Hewlett-Packard spin-off Hewlett Packard Enterprise in a more than five-year-old battle. If Hewlett Packard Enterprise emerges victorious in this $3 billion lawsuit, it would be a big blow for Oracle.

Meanwhile, the cloud is crucial for Oracle because it needs to show that its repertoire of applications and database products put it ahead in converting customers to the cloud. Cloud computing hit a quarterly sales run rate of $700 million in the fiscal third quarter, while gross margins were nearly 80%.

Any unfavorable news from Oracle's cloud division could prove extremely harmful to the company. Unfortunately, a former senior finance manager is suing Oracle, claiming that she was terminated in retaliation for complaints about accounting practices in the company's cloud services business.

This whistle blower's complaint was followed by a shareholder suit against Oracle, accusing the company of making "materially false and misleading statements regarding the company's business, operational and compliance policies."

If Oracle is investigated by the Securities and Exchange Commission and found guilty of malpractice, its share price would tumble, but that looks unlikely.

Many Wall Street analysts have underestimated Oracle's growth potential. The biggest proof of this is that Oracle has beaten consensus earnings expectations for three consecutive quarters.

Oracle is expected to report fiscal fourth-quarter earnings of 81 cents a share, compared with 78 cents a year earlier, on sales of $10.46 billion, down 2.3% from a year earlier. Given its recent legal issues, Oracle needs to comfortably beat earnings now more than ever.

Solid fiscal third-quarter results helped. Although revenue fell more than 3% last quarter, Oracle Chief Executive Safra Catz, the highest-paid female executive in the United States, sought to calm nerves by claiming that targeted growth segments had showed improvement.

Importantly, she said that Oracle's cloud business has entered a hyper-growth phase.

For the full fiscal year, analysts expect earnings per share to fall 5.4% year over year, but they are projecting a 7.3% increase for the fiscal year ending next May.

Over the next five years, Oracle's 6.69% annual EPS growth estimate pales by comparison with the application software industry's estimated 17.31% growth. However, Oracle has also maintained a record of beating estimates.

Since cratering in February, Oracle's stock has gotten new life, thanks to fiscal third-quarter earnings. A robust fiscal fourth quarter could put the spotlight back on the company's business, reducing focus on the lawsuits.

For decades, Oracle dominated the database management software industry, having grown enough to generate tens of billions in annual sales.

Goldman Sachs thinks that the fiscal fourth quarter will serve as a significant indicator of the speed of the transition to the cloud.

With shares trading at 13.8 times forward earnings, Oracle's stock is cheap compared with rival Microsoft at 17.3 and SAP at 17.1. Once the cloud revenue starts to meaningfully move Oracle's top and bottom lines, its stock could rally towards analysts' median 12-month price target of $44, which would represent a 14% increase, and possibly beyond.


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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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