Oracle Corp (ORCL) Foresees Highs?

by Dan February 22, 2017 1:08 pm • Trade Ideas

Shares of Oracle have had a fairly stealthy rally so far in 2017, up 10% on the year. After consolidating for the better part of the last year between $38 and $42, ORCL this week broke out to a new 18 month high:

ORCL 1yr chart from Bloomberg

It’s possibly the recent price action from old tech laggard Cisco Systems (CSCO) has investors looking for catch up plays, but with the stock market making new all time highs daily, it makes sense to consider the potential for cheap tech stocks to at least test their recent highs, as CSCO did last week, kissing its 2007 high (but still well below its 2000 high):

CSCO 10yr chart from Bloomberg

ORCL is down about 10% from its post dotcom bust high of $46.54 from late 2014:

ORCL 5 year chart from Bloomberg

After the stock’s initial 4% one day drop on December 16th, following ORCL’s fiscal Q2 results, investors appear less worried about weak organic cloud revenue in the quarter, per Barron’s:

While the company now claims to have surpassed competitor Salesforce.com (CRM) in cloud computing revenue, the Street is focused on the fact that cloud revenue was weaker on an “organic” basis, meaning, when stripping out the benefit of some revenue from Netsuite, which Oracle acquired during the quarter.

Specifically, Oracle’s license revenue growth missed expectations, and its bookings for its “SaaS” and “PaaS” cloud revenue also came in light.

The next identifiable catalyst for ORCL will be their fiscal Q3 results, not yet confirmed on March 15th. The options market is implying about a 3.7% move between now and the close on March 17th, which seems pretty fair when you consider the average one day post earnings move over the last 4 quarters has been 3.6%, and the average one day post earnings move over the last 10 years has been about 4.8%.,

If the company were to report better organic cloud growth, coupled with lower than expected costs that might come out of Netsuite, the stock could easily pull a CSCO, making a run at its all time highs, as it trades below a market multiple of 16.5x.  That said the recent run-up in the stock might discount only mild improvements, and set up for disappointment. Therefore, anyone looking to play for a breakout towards those highs, or those that have benefited from the recent run with long stock should look to position for that next leg higher with defined risk, in case earnings don’t reflect recent optimism in the stock.

So What’s the Trade?

Bullish/ Stock Alternative/ Replacement

ORCL (42.30) Buy the March10th weekly / March24th weekly 42.5 call calendar for .50
  • Sell 1 March10th 42.5 call at .35
  • Buy 1 March24th 42.5 call for .85

 

Breakeven on March 10th expiration: Gains with the stock at or near 42.50, potential small losses if below where the stock is trading currently, and small losses if the stock gaps higher above 42.50 between now and March 10th. The most that can be lost on the position is 0.50.

Rationale – ORCL has run up $2 in a straight line. Entries at this point are risky and for those that have been long the stock, defining risk at this point into the event makes sense. The implied move on earnings is more than 1.50, so this position risks less than 1/3 of that move. It’s breakeven is 43 (after the March 10 calls expire) but risk can be further reduced after March 10th decays or becomes worthless. The idea here is that we’ve financed a breakout play that captures earnings, while selling a close to the money call after the recent run-up in the stock. This reduces delta exposure until the event itself, and protects against a pullback in the stock before then. The biggest risk to the position is a big move higher or lower between now and the 10th as the call calendar will do best if the stock stays near this area with the best case scenario slightly higher at 42.50.