It’s not every day the market screws up and offers us an opportunity like it’s doing today with Oracle, which is down around 8% (as of this writing) after reporting quarterly earnings last night. Apparently Wall Street isn’t happy that revenue and earnings missed their forecasts this quarter…? Just another example of Wall Street’s short-sightedness missing the big picture. I couldn’t care less what earnings are this quarter. This quarter doesn’t matter. This year doesn’t matter. It’s the company’s business model, capital allocation policies, and long-term plan that will ultimately drive the performance of the stock.
Revenue “missed” expectations because Oracle is shifting business from the more traditional software to cloud-based services. Traditional software sales are recognized immediately but cloud sales are recognized more slowly over time since it’s a subscription service (recurring revenue). Plus, Larry Ellison explained that cloud-based services are 3x more profitable to the company. It was pretty funny when he said that Oracle didn’t “miss” on the quarter – Wall Street analysts didn’t project correctly. As business continues to transition to the cloud, revenue growth will remain under pressure. But this misses the big picture. The thing to focus on is the transition in the business model to recurring revenue, which is a much stronger model and far more profitable, as the world shifts to the cloud.
Oracle also took out $10 billion of new debt back in April. This seemed odd because they already have around $12 billion of net cash on the balance sheet and they generate over $10 billion of additional free cash flow per year. I’m assuming they’re just taking advantage of low rates, in case they continue to rise. Regardless, they’ve loaded the gun and have plenty of cash to utilize for share buybacks (I’m sure they’re in the market today) or a big acquisition.
Bottom line: you don’t bet against Larry Ellison. The guy is a shark that loves to destroy the competition. I happily bought more this morning and will gladly average down as long as it continues to fall.
Oracle (ORCL) – 1 year
-Nick