Event: ORCL reports its fiscal Q2 earnings today after the close. The options market is implying about a 5.5% one day move, which is right around both the 4 qtr avg of about 5.75% and the 8 qtr avg of about 5%.
Sentiment: Wall Street analysts are somewhat positive on the stock, with 28 Buys, 14 Holds and only 2 Sells, with an average 12 month price target of around $36.50. Though short interest is only at around 1.4%, that’s actually near a 3 year high. ORCL stock is flat over the last 2.5 years.
Options Open Interest: Open interest is almost evenly split between calls and puts, though puts have been much more active in the past, trading almost twice as much volume as calls in that period. The weekly 33 puts are what have dominated volume this week, trading over 30k so far this week, mostly buyer initiated. Open interest on that line is over 40k. The only other line with that much open interest is the Jan18th expiry 37 calls.
Price Action / Technicals: CORCL’s chart has taken on a nastier look after last week’s aggressive selling, in which the stock fell from its intraday high of $35.75 down to a low near $33, which happens to be the level of the 200 day moving average:
The daily chart has the look of a rangebound stock, but the more worrying aspect of the price action in the past year is that all of the big gaps have been lower. That’s a potential sign that sellers have been more aggressive than buyers.
The longer-term weekly chart shows the importance of the $36-$37 area on the upside:
Despite multiple tests of that area in the past year, the stock has failed to breach the May 2011 high of $36.50. On the downside, the first major support is the $30 level, which was the low for ORCL this summer.
Fundamentals: ORCL gapped lower almost 3% on Thursday, December 12th, after both RBC and Morgan Stanley downgraded the stock in the morning. The main reason for the downgrade was the increasing competition from other cloud offerings, and ORCL’s inability to keep up with in a more difficult operating environment. Both ORCL and SAP, the 2 historically dominant enterprise software companies, are behind the ball in the cloud. ORCL’s current offerings are less flexible and more costly than nimble competition.
Moreover, the macro environment has become less favorable as enterprise spending has slowed in 2013 (see CSCO, IBM, etc.). While the stock looks cheap on the surface, at 14.5x with 7-10% earnings growth over the next few years, ORCL has not grown sales in 2 years ($36.9 billion in 2011, $37.6 in 2013), so most of the earnings growth is due to accounting gimmicks rather than real business progress.
If ORCL does not demonstrate the strength of its value proposition vs. its upcoming competition, investors are likely going to be quick for the exits after this quarter.
Volatility: Realized volatility in ORCL has been very low over the past couple months, but option traders are anticipating a potentially big move on earnings tomorrow, which is why implied volatility is still near where it was prior to the past couple earnings reports:
The implied move is fairly priced (5.5%) vs. recent history. A tail move below 30 or above 36 would be a real surprise.
Our View: Although the stock was downgraded by two analysts just last week, most research analysts who cover ORCL are still positive on the name given valuation and relatively stable operating results. Those managing the money are showing more concern, however. The stock has been a major relative underperformer vs. the rest of the market since mid-2011, and the overall backdrop for big enterprise/federal suppliers in tech has been weak for quite some time now. We are not optimistic on the fundamental or technical backdrop for 2014, even if this quarter was ok. Guidance will be key to watch, and we might chime in with a trade later today if we find a structure we like.