Oracle (ORCL) – Cloud Nothings?

by Dan March 15, 2017 1:13 pm • Chart of the Day

Tonight after the close Oracle (ORCL) will report their fiscal Q3 results. The options market is implying about a 3.5% one day move tomorrow. With the stock just below $43, the March 17th 43 straddle (the call premium + the put premium) is offered at $1.50, if you bought that and thus the implied move, you would need a rally above $44.50 or a decline below $41.50 to make money. The average one-day post-earnings move over the last four quarters has been just below 4%, while the stock has declined about 4.25% following each of the last two reports. The year average one-day post earnings move has been 4.85%.

Earlier in the week we updated a trade idea from last month in the stock targeting a post-earnings breakout with defined risk: (read here).

Shares of ORCL have outperformed large cap tech in 2017 up 11.5% on the year, now about 1% from the 52-week highs made late last month. $42 appears to be fairly decent near-term technical support:

ORCL 1yr chart from Bloomberg

$45-ish might serve as the first target on the upside, the post-financial crisis and dotcom bubble highs near $47 could act like a magnet on a meaningful beat and raise:

ORCL since 1999 from Bloomberg

Back in mid-December, initial investor discontent centered around weak organic cloud revenue in their fq2, per Barron’s:

While the company now claims to have surpassed competitor (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 stock’s ytd gains clearly discount investors’ concern for a continuation of this trend. ORCL trades a little above 15x expected fiscal 2018 eps growth of 10%, which would mark their first double digit year over year eps growth since 2012, despite what would be low single digit sales growth. Guidance that suggested a return to double-digit eps growth, a former hallmark of Larry Ellison’s tenure as CEO could clearly catalyze the move back towards the all-time highs. But given the stock’s recent strength, despite difficult organic cloud sales, weak guidance would likely have the stock down at least in line with the implied move, possibly on its way back to $40.