Shares of Oracle got off to a bad start on the first trading day of the year as tech publication The Information reported (on Jan 2nd) In Major Shift, Amazon, Salesforce Move Away From Oracle:
Amazon, which began exploring Oracle alternatives in the early 2000s, is further along. Its retail unit has switched two internal databases that underpin its massive e-commerce operation from Oracle to NoSQL, a type of open-source database software, said two people with knowledge of the change. These include Customer Master, Amazon’s database for retail customer data such as names, mailing addresses, emails and authentication data; and Order Master, which handles data about customer orders, items and shipments, the people said.
Salesforce, which uses Oracle’s database in its customer management and marketing automation software, also is moving away from Oracle. Salesforce has been developing an Oracle database replacement, code-named Sayonara, Japanese for “goodbye,” and now is ready to deploy it internally, according to a former Salesforce employee with knowledge of the matter. Salesforce expects to be completely off Oracle by 2023, this person said. Fortune first reported on the Sayonara project in May 2016. A Salesforce spokeswoman said the company doesn’t comment on rumors.
But since then, investors have quickly forgotten that news. And after closing at a fresh 7 month low on Jan 2nd, the stock is up nearly 14% since, now up 11% on the year, and quickly approaching its 52 week high made in September:
The one year chart is kind of interesting when you look at the series of gaps following earnings. Back on Jan 2nd the stock filled in the June earnings gap, and since the stock has filled in both the Dec and Sept gaps. Investors might now want to reconsider the reasons for the fiscal Q1 and Q2 post earnings gaps… two consecutive revenue misses in their cloud computing divisions (here and here).
With the stock trading near 18x, and essentially no benefit from the corporate tax rates, aside from repatriation and questions arising about key database customers and decelerating cloud sales growth, the stock might be fully valued near term at key technical resistance. While the next identifiable catalyst for the stock won’t be until their Q3 earnings in mid-March, I would not be surprised if the investors start to speculate who the company might look to buy to reaccelerate cloud growth. The problem here is that there are no cheap options in the public or private markets that could actually move the needle on ORCL’s $40 billion revenue base. For years it’s been rumored that ORCL would buy Frenemy Salesforce.com (CRM), but that stock now sports a $82 billion market cap, which is about 8x its trailing 12-month sales.
At any rate, this stock looks poised for a possible pullback to at least $50, possibly $48 as its 2018 outperformance seems to be more of the result of investor interest in laggards than any positive fundamental shift.
So what’s the trade?
ORCL ($52.43) Buy March 52.50 / 47 put spread for $1.35
- Buy to open 1 March 52.50 put for 1.55
- Sell to open 1 March 47 put at 20 cents
Break-Even on March Expiration:
Profits of up to 4.15 between 51.15 and 47 with max gain of 4.15 below 47
Losses of up to 1.35 between 51.15 and 52.50
Rationale: this trade is a slightly in the money, risks 2.5% of the stock price playing for a retracement of a good part of the last month’s move over the next 6 weeks. A breakout to new highs and holding that level would be the time to re-assess the trade and use as a stop loss to the upside.