Big Printin’ $ORCL – Ellison Trying to Hurd Catz

by Dan June 2, 2016 3:52 pm • Commentary

Shares of Oracle Corp (ORCL) are down 4% on news that a former internal accountant filed a whistleblower lawsuit about the company’s accounting practices relating to cloud services revenue, as reported by Reuters:

In a complaint filed in U.S. District Court in San Francisco, the former executive, Svetlana Blackburn, accused upper management of trying to push her to “fit square data into round holes” to make Oracle Cloud Services’ results look better.


Blackburn said her bosses instructed her to add millions of dollars of accruals for expected business “with no concrete or foreseeable billing to support the numbers,” and said executives above her added accruals on their own.

As you would expect:

“We don’t agree with the allegations and intend to vigorously defend the matter,” Oracle spokeswoman Deborah Hellinger said.

ORCL’s Chairman, Co-Founder and former long time CEO Larry Ellison has had a sort of love hate relationship the notion of what exactly constitutes cloud computing, as he infamously stated back in 2008, “what the hell is cloud computing”??:

If as Blackburn says, ORCL is trying to fudge the ways cloud related revenues are accounted for, I can only imagine that these similar practices are conducted at smaller players who on a GAAP basis are bleeded losses on said sales. But I’ll save that for another post.

Options volume ran hot today in ORCL, at nearly 8x average daily volume.  The largest trade of the day appeared to be a bullish risk reversal, where a trader sold to open 5,000 of the July 8th weekly 35 puts at 29 cents and bought to open 5,000 July 8th weekly 41 calls for 33 cents. This trade resulted in a net debit of 4 cents, offering profits above 41.04 and losses below 35.04 on July 8th weekly expiration.

The next identifiable catalyst will be fiscal Q4 earnings that should fall in the third week of June.

Additionally there appeared to be an outright bearish (or defensive) bet placed shortly after the open when the stock was $38.80, where a trader paid $1.32 for 2,000 of the September 37 puts to open. These puts break-even at $35.68, down about 8% from the trading level.

ORCL is a relatively cheap stock to its group, mega cap tech and the broad market, trading a little less than 14x expected fiscal 2017 eps growth of 7%, with about 31% of their $161 billion market cap in cash, but only $11 billion net of debt. The company has a massive commitment to capital return with an existing $10 billion share repurchase and a quarterly dividend that sports an annual yield of 1.55%.  The problem for the company in my opinion lies with revenue growth, or lack there of.

Historically the company has been fighting off the declines of legacy products and growth only coming from acquisitions, as I stated in a post late last year:

ORCL is a roll up for all intents and purposes, and I suspect ORCL is going to be forced to make a large acquisition and soon to help stimulate growth. Which is has long been their plan.

Dating back to their $10 billion purchase of PeopleSoft in 2005, the company has made a bunch of smaller, but still very large purchases (Siebel for $6 billion in 2006, Hyperion for $3.3 billion in 2007, BEA Systems for $8.5 billion in 2008, Sun Micro for $7.4 billion in 2010, RightNow for $1.5 billion in 2011, Taleo for $1.9 billion in 2012, Acme Packet for $2.1 billion in 2013, and Micros for $5.3 billion in 2014).

Back to the here and now, the stock stopped on a dime at its 200 day moving average, just above $38, which for now should serve as near term technical support:

ORCL ytd chart from Bloomberg
ORCL ytd chart from Bloomberg

On a longer term basis the chart looks a tad more challenged, with what could be a massive head and shoulders pattern possibly forming, with $35 the neckline:

ORCL 5 yr chart from Bloomberg
ORCL 5 yr chart from Bloomberg