Oracle's (NYSE:ORCL) stock recently rebounded sharply from its 52-week low after its third-quarter numbers topped Wall Street's expectations. Its revenue rose 2% annually (3% in constant currency terms) to $9.8 billion, beating estimates by $50 million and marking the company's second straight quarter of accelerating revenue growth.

Its non-GAAP net income stayed nearly flat at $3.2 billion (up 1% in constant currency), but buybacks boosted its earnings 11% to $0.97 per share, beating estimates by a penny. Those growth rates seem anemic, but brighter days could be ahead for Oracle -- even as it faces sluggish enterprise spending amid the novel coronavirus crisis.

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Oracle's strengths are offsetting its weaknesses

Oracle is trying to offset the softness of its older legacy businesses, which include on-premise database services, business software, and hardware, with the strength of its newer cloud services.

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That transition has been rough thanks to tough competition from bigger rivals like Amazon (NASDAQ:AMZN) Web Services (AWS). Two developments sparked additional concerns: Oracle stopped disclosing its cloud service revenue separately in mid-2018, and co-CEO Mark Hurd, who spearheaded its cloud strategy, passed away last October.

But Oracle's third-quarter results soothed some frayed nerves. Its cloud services and license support revenue rose 4% annually (5% in constant currency) and accounted for 71% of its revenue -- up from 69% a year earlier. Within that business, its Fusion and NetSuite apps all posted high double-digit growth.

The unit's gross margin expanded by a percentage point sequentially to 86%, thanks to rising renewal rates and improved scale. Oracle expects that margin expansion to continue, which suggests it can withstand the pressure from Amazon's growing cloud-based database software business.

The strength of that core growth engine offset revenue declines at its cloud license and on-premise license unit (down 2%), as well as its hardware and services units (down 6% and 1%, respectively). All three units fared slightly better in constant currency terms.

Simply put, the seeds planted by Hurd, CEO Safra Catz, and CTO Larry Ellison are now bearing fruit. To top it off, currency headwinds waned over the past two quarters and narrowed the gap between its reported and constant currency growth:

YOY revenue growth

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Reported

(1%)

1%

0%

1%

2%

Constant currency

3%

4%

2%

1%

3%

YOY = Year-over-year. Source: Oracle quarterly reports.

A limited impact from the coronavirus

During the conference call, Catz stated that the company's third-quarter growth could "have been even better" if the coronavirus pandemic hadn't accelerated at the end of the quarter. Catz believes that its core subscription business "will continue to grow" with "minimal impact from the virus" during the fourth quarter, since most of those contracts were already signed.

Catz admitted that Oracle still couldn't gauge the full impact of the coronavirus on its customers and suppliers yet, but retained a fairly stable (albeit wider) forecast for the fourth quarter. On a constant currency basis, it expects a 2% decline to 2% growth in revenue (with 3%-5% growth in subscription revenue) and non-GAAP EPS growth of 3%-9%. Catz also expects Oracle's revenue growth to accelerate in fiscal 2021, with its subscriptions accounting for a larger percentage of its top line, if the global economy stabilizes.

Oracle bought back $13.9 billion in shares during the first nine months of 2019, and it authorized another $15 billion buyback. I'm not a big fan of Oracle's big buybacks, since raising its dividend would arguably attract more investors -- but they should set a floor under the stock, which already looks cheap at less than ten times forward earnings.

The key takeaways

Oracle still faces plenty of challenges, but its steady growth and stable outlook suggest that brighter days could be ahead. Investors should keep a close eye on Oracle over the next few quarters and see if its growing cloud business can weather the coronavirus crisis and a possible global recession. It it does, it could emerge as a stronger cloud player with better defenses against Amazon.