Why Oracle Corporation Shares Sank

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Oracle Corporation  (NYSE: ORCL  ) sank 2% this morning after the software giant was downgraded by both RBC Capital (from outperform to sector perform) and Morgan Stanley (from overweight to equal weight).

So what: RBC analyst Matthew Hedberg reiterated his price target of $35, while Morgan Stanley analyst Keith Weiss removed his $36 price target altogether, triggering concern on Wall Street over the stock's upside going forward. Although momentum investors might be attracted to Oracle's recent share-price rally, both analysts are concerned that weak information-technology spending and, more significantly, rapidly growing competition from cloud computing rivals, will weigh heavily on the stock in 2014.

Now what: The analysts see multiple challenges ahead for Oracle. "We believe SaaS (software-as-a-service) vendors such as Salesforce.com, Workday and others should continue to gain share in the applications market as IT shops look to save costs and streamline operations," noted RBC. And in terms of valuation, Morgan Stanley said, "With its recent run, Oracle looks fairly valued given our lack of conviction around forward catalysts." When you couple those headwinds with Oracle's industry-matching P/E, I'd agree that the risk/reward trade-off looks a bit unattractive.

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