Event: ORCL reports its fiscal Q4 earnings tomorrow after the close. The options market is implying about a 4.5% move post-earnings, which is in line with the 4 qtr avg move of about 4.5%, but lower than the 8 qtr avg move of about 5.5%.
Sentiment: Wall Street analysts are fairly bullish on the stock with 30 Buys, 12 Holds and 2 Sells. The average 12 month price target is around $38. Options open interest is evenly split between puts and calls, and recent volume has been evenly split as well.
Fundamentals / Valuation: The poor IT spending environment in the first quarter of 2013 was reflected in both ORCL’s and IBM’s weak results. However, since those misses, the bar has been lowered. Perhaps more importantly, large cap tech has regained some favor in the investor community as a value area, appealing for decent yield and strong balance sheets. Especially when compared to the classic “defensive” sectors, like Utilities and REITs that I highlighted yesterday.
Specific to ORCL, here is what GS research said in their preview for this quarter:
We expect a solid quarter with slight upside as not only do we believe that ORCL benefited from a strong pipeline, but also continued to work through execution challenges that existed in F3Q13. However, given the continued challenging IT spending backdrop coupled with what we expect will be conservative guidance for the company’s F1Q14, we are lowering our license forecast for the quarter. We now model F1Q14 license revenue of $1.71bn or +7% yoy vs. our prior view of +13% ($1.79bn) and consensus of $1.69bn (+6% yoy and -60% qoq). Our non-GAAP EPS forecast of $0.58 is unchanged and in-line with consensus. Despite the lowering of our F1Q14 license view, we continue to favor ORCL in large cap software despite its underperformance YTD as we believe execution improvement and consistency of results will translate into non-GAAP EPS upside vs. the Street as FY14 unfolds.
On a valuation basis, ORCL is priced at 16x P/E with earnings growth of 8% projected over the next 2 years. Relatively fair, though it only pays a 0.7% dividend yield, so less investor support from the yield community.
Price Action / Technicals: ORCL’s major gap down on its last earnings report ended down almost 10%, its largest volume day since December 2011. However, the stock did find some semblance of support at its rising 200 day moving average on multiple occasions over the past 3 months, and is now trading above both its 50 day (pink) and 200 day (black) ma:
[caption id="attachment_27268" align="alignnone" width="632"]
1 year daily chart of ORCL, Courtesy of Bloomberg[/caption]
That sets up the 33 area as important support, while obvious resistance is the high from earlier this year, around 36.50 (which is also the high from 2011).
Volatility: 30 day implied volatility is near 1 year highs ahead of earnings, as traders are a bit nervous about a big move after last quarter’s 10% move lower:
[caption id="attachment_27270" align="alignnone" width="675"]
1 year chart of 30 day implied (red) vs. 30 day realized (blue) in ORCL, Courtesy of LiveVolPro[/caption]
30 day realized volatility had one large jump on that earnings move from last quarter, and has been relatively stable around 20 since. 30 day implied volatility should settle back down around 20 after earnings once again.
My View: The key story is going to be execution and guidance. If ORCL’s explanation for last quarter’s miss was legitimate, then we should see better numbers in this quarter and next. If not, then the next move below 33 is not likely to see a bounce. The biggest threat I see in the long-run is ORCL losing more and more customers to upstart competitors in the cloud who are more nimble, cheaper, and offer similar service. The next 6 months will offer more clarity on whether that comes to pass. ORCL could still use its muscle and premier position to acquire its way to continued growth, and its strong balance sheet to attract a more diverse investor base. For now, it seems like a fairly valued name, with no strong technical direction.