Oracle (ORCL) - Get Report is finally going to deliver the strong quarter investors have waited for all year. But Thursday's top-line blowout, preannounced by management last week, may not be enough to lead the stock much beyond its narrow trading range.
"I'm still skeptical," says Kyle Flynn, an analyst with TCW Asset Management, which holds a small position in Oracle. Flynn has a list of concerns, including the potential for a delay in the next version of its database software and the company's pattern of a strong fourth quarter followed by several weak ones.
"It (the share price) has been stuck between $11.50 and $14 for several years. I'm not sure that anything that happens now is going to move it much beyond," Flynn says.
Part of the problem for investors hoping the shares will move is this: Oracle has appreciated by about 14% this year -- it closed Wednesday at $14.53 -- and is no longer particularly cheap on a P/E basis. "Do I think the stock might make some gains? I do," says Loomis & Sayles analyst Tony Ursillo. "But the better question is will Oracle outperform -- and the answer is no." His company has a "very small" position in Oracle.
As of Monday's close, Oracle was trading at about 18 times forward earnings, as were
is cheaper at 16 times, and so is
at 15 times. Although most of those companies are not software players, they are the kind of stocks that fund managers could choose as a vehicle for money they plan to invest in big-cap tech.
Indeed, some value investors, like Pat Becker Jr., of Becker Asset Management, say Oracle already has gotten too expensive to interest them. But Becker, who has been skeptical about Oracle in the past, gives the company credit for "good execution" and says "the market is rewarding it" (with the move to the $14 range).
To view Street Insight's video preview of Oracle, please click here
To be fair, the strong fourth-quarter numbers begin to answer critics of the company's acquisition strategy which -- until now -- has led to strong bottom-line results, somewhat offset by weak organic growth in software-applications licenses.
Discounting revenue earned by the former Siebel Systems and Retek, both snapped up during the company's $18 billion acquisition binge, applications license revenue grew by a hefty 56%. Including the acquisitions, the applications business grew by 83% to $641 million. (Revenue from the former PeopleSoft is included in both calculations because the company was already in the Oracle fold in the year-ago quarter.)
Citigroup analyst Brent Thill, one of the few sell-side analysts to push hard on the organic-growth issue, notes that the strong applications performance comes against an easy comparison, but concedes that the current results are well above his estimates.
However, Thill, along with a number of other analysts, is somewhat concerned over an apparent drop in operating margins. By plugging the latest guidance into his model, Thill figures operating margins for the year will hit 39.8%, down from earlier expectations of 40.6%; while margins in the quarter will likely be 43%, compared to earlier expectations of 45.7%. Citigroup has an investment banking relationship with Oracle.
Ted Moore, an analyst with the National City Private Client Group, says he was pleased with the strong growth in database revenue (18% year over year) and added that the applications business "is looking more viable than some detractors would have anticipated."
However, he was somewhat surprised that margins weren't higher given the strong top-line numbers, and says he and other investors will be listening for an explanation on Thursday's call. His company has a long position in Oracle.
Of the 32 analysts on the sell side who follow Oracle, 23 rate the stock a buy or a strong buy; eight, including Thill, have a hold on the stock, and one has a strong sell, according to Thomson First Call.
Wall Street, of course, likes upside surprises, and Eagle Asset Management portfolio manager Ashi Parikh says that will help the stock. "Street expectations are low enough so that any kind of decent execution will move the needle," he says.
Oracle will release its final earnings results for the fourth quarter after Thursday's close and will host a conference call at 5 p.m. EDT.