Oracle (ORCL 2.36%) posted its latest earnings report on March 9. For the third quarter of fiscal 2023, which ended on Feb. 28, the enterprise software company's revenue grew 18% year over year (21% in constant currency terms) to $12.4 billion, but narrowly missed analysts' expectations by $20 million. However, its adjusted earnings rose 8% to $1.22 per share and cleared the consensus forecast by $0.02.

Oracle's stock dipped after that mixed report, but it has still risen more than 10% over the past 12 months. Many investors likely stuck with Oracle because it's considered a safe-haven stock for a bear market, but will it head higher this year?

An IT professional works on a server.

Image source: Getty Images.

Its organic growth is decelerating

Over the past several years, Oracle expanded its cloud-based services through investments and acquisitions to reduce its dependence on its slower-growth on-site data base software and hardware businesses. That costly transformation -- which included its acquisition of NetSuite in 2016, its launch of new enterprise resourcing planning (ERP) services, and the expansion of its cloud-based infrastructure platform -- enabled it to generate stable growth again.

That's why Oracle acquired the healthcare IT giant Cerner last June, which boosted its reported revenue by double-digit percentages over the past three quarters -- even after being throttled by the strong dollar and its exit from Russia last March. Most of its recent growth has been driven by its cloud and ERP services, which all generated high double-digit sales growth over the past three quarters.

On an organic constant-currency basis, which excludes Cerner, Oracle's revenue rose 7% year over year in the third quarter as its remaining performance obligations (RPO), or the revenue it hasn't yet booked from its existing contracts, increased 26%. But both of those growth rates decelerated from the second quarter:

Metric*

Q1 2023

Q2 2023

Q3 2023

Revenue growth (YOY)

8%

9%

7%

RPO growth (YOY)

22%

28%

26%

Data source: Oracle. YOY = year over year. *Organic constant currency.

On a reported basis, Oracle expects its revenue to rise 15% to 17% year over year in the fourth quarter on a reported basis and 17% to 19% on a constant currency basis. Those estimates imply its organic growth will decelerate again in the fourth quarter.

Oracle's cloud business is still growing

That slowdown is minor, but it indicates that Oracle isn't immune to the cooler software spending that hurt Amazon, Microsoft, and Alphabet's Google over the past year. Nevertheless, Oracle reiterated its outlook for more than 30% growth in cloud revenue in organic constant-currency terms for the full year -- compared to its 22% growth in fiscal 2022.

That forecast implies the growth of its cloud-based businesses will still accelerate in the fourth quarter and offset the slower growth of its on-site and legacy database businesses. That acceleration could also be driven by ByteDance's TikTok, which moved the data of its U.S. users from Alibaba's servers to Oracle's cloud infrastructure platform last year. However, a proposed ban on TikTok in the U.S., which has been gaining bipartisan support in recent months, could still unexpectedly cause Oracle to miss its bullish cloud forecast for the full year.

Oracle's margins are still being squeezed

During the conference call, CEO Safra Catz said fiscal 2023 would be the "trough year" for its operating margins as it integrates Cerner and generates a higher mix of revenue from its lower-margin cloud services. Its adjusted operating margin fell by 2 percentage points to 47% in fiscal 2022, then dipped to 41% in the first nine months of fiscal 2023.

But its trailing-12-month free cash flow (FCF) still increased 11% year over year to $7.3 billion at the end of the third quarter -- which easily covered its $3.4 billion in dividends and $1.7 billion in buybacks over the past 12 months.

That's why it wasn't surprising when it raised its quarterly dividend by 25% to $0.40 per share and lifted its forward yield to about 1.9%. It also bought back more than a third of its shares over the past five years.

In addition, Oracle still had $8.8 billion in cash and marketable securities at the end of the quarter, which gives it plenty of room for more dividend hikes, buybacks, and investments in its cloud ecosystem.

Oracle's low valuation will limit its downside potential

Analysts expect Oracle's revenue to rise 18% this year as its adjusted earnings per share (EPS) stay roughly flat. But after lapping its acquisition of Cerner, they expect its revenue and adjusted EPS to grow 8% and 14%, respectively, in fiscal 2024.

Based on those estimates, Oracle trades at just 16 times forward earnings. Microsoft and Alphabet, which are both expected to grow slightly faster than Oracle, trade at 24 and 18 times forward earnings, respectively.

Oracle isn't an exciting stock, but its solid fundamentals and low valuation should limit its downside potential this year. I'm not sure if it will outperform the market, but it should remain a safe place to park your cash until the bear market finally ends.