Event: Oracle (ORCL) reports fiscal 2017 Q1 results tonight after the close. The options market is implying about a 4% one day post earnings move in either direction tomorrow, which is basically in line with its 4 qtr average one day move.
Price Action / Technichals: despite all the mixed news for the company in 2016, the stock has massively outperformed the Nasdaq Composite, up 12% ytd vs 5%, and large cap software peers Microsoft (MSFT) up 3% ytd, Adobe (ADBE) up 6% and Salesforce.com (CRM) down 5%.
On a near term basis, the technical support / resistance are fairly obvious, with the 2016 double top at $42 serving as resistance and $38 near term support on the downside:
[caption id="attachment_66329" align="aligncenter" width="600"]
ORCL 1yr chart from Bloomberg[/caption]
Taking a longer term view, the stock was rejected in late 2014, just near its 2000 high, serving as an epic double top, while the uptrend that has been in place from the 2009 lows was breached earlier this year, with $35 the likely next stop on any meaningful sell-off:
[caption id="attachment_66331" align="aligncenter" width="600"]
ORCL since 1999 from Bloomberg[/caption]
What to watch for: I’ll just reiterate what I always do about a stock like ORCL. I would place it in the no-growth defensive basket of mega-cap tech. The stock trades below a market multiple, manufactures mid single digit eps growth through buybacks, but is likely stuck in the low single digit sales growth category for the eternity. This is one of the main reasons ORCL is very acquisitive, with their latest deal, a $9.3 billion offer for Netsuite (N), an enterprise cloud based application software company of which ORCL’s CEO and founder Larry Ellison already owns 40% of. This deal will likely be a focus of the QnA as Netsuite’s second largest shareholder T. Row Price is opposing the deal as they think the offer undervalues the company.
Another issue that investors will seek more details on will be the lawsuit filed by former internal ORCL accountant regarding 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.
I guess most importantly, investors need to see a continuation of cloud based sales growth during their transition from legacy “on-premise” applications. Here is Nomura analyst Fred Grieb on his expectations for ORCL’s cloud business from a note to clients last week:
My take into the Print: I would not expect to see too many surprises as it relates to their Netsuite offer, or the accounting lawsuit. If the company were to show an acceleration in cloud growth in line or greater than street expectations I would expect to see the stock breakout to new 52 week highs. If the company were to have hit a speed-bump, and experienced a downshift in growth, causing their acquisition strategy and accounting for cloud services to come under scrutiny, then the stock is at $38 quick. The most likely outcome is that the stock is within the implied move on tomorrow’s close.
So What’s the Trade?
ORCL ($40.85)
Bullish – Buy the Sept 42.5/Nov 40 vertical call calendar for 1.65
- Sell 1 Sept 42.5 call at .20
- Buy 1 Nov 40 call for 1.85
Rationale – This trade is basically an in the money call in November, with some financing from selling outside the implied move on tomorrows expiration. If the stock goes higher this is a winner. If it goes sideways the sale of the September call will help alleviate a 20-25% vol crush in November. If the stock goes lower, this will be a loser, but with defined risk where the max that can be lost is 1.65 (the implied move). Since this is a calendar vertical, if the stock moves higher but is below 42.50 tomorrow afternoon, the Sept short call be closed and rolled to October or November.
OR
Bearish/Hedge – Buy the Sept 40.5/38 put spread for .55
- Buy 1 Sept 40.5 put for .65
- Sell 1 Sept 38 put at .10
Rationale – This is a straight up bearish bet looking for the stock to be below 40 tomorrow. This is not that bad of a hedge for existing holders as it’s just a little more than 1% in the stock. That type of leakage to hedge can be made up afterwards with some overwriting for long holders.