Oracle's (ORCL 0.29%) stock price fell 14% on Sept. 12 after the tech giant posted its latest earnings report. For the first quarter of fiscal 2024, which ended on Aug. 31, its revenue grew 9% year over year (8% in constant currency) to $12.45 billion, but missed analysts' estimates by $20 million. Its adjusted EPS rose 16% to $1.19 and beat the consensus forecast by four cents.
Those numbers weren't disastrous, but Oracle might also have been due for a pullback. Even after its post-earnings decline, its share prices have still risen 44% over the past 12 months. So does this stock still have room to run over the next 12 months?
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What happened to Oracle over the past few years?
Oracle is the world's largest database software company. Over the past decade, it transformed a large portion of its on-site software into cloud-based services. It acquired the cloud-based enterprise software provider NetSuite in 2016, expanded its own Oracle Cloud Infrastructure (OCI) platform, rolled out new cloud-based enterprise resourcing planning (ERP) services like Fusion, and bought the healthcare IT giant Cerner last year.
That evolution kept Oracle in the cloud race. Its revenue rose 4% in fiscal 2021 (which ended in May 2021), 5% in fiscal 2022, and 7% on an organic basis (excluding Cerner) in fiscal 2023. At the end of fiscal 2023, CEO Safra Catz attributed its accelerating revenue growth to its cloud applications and infrastructure businesses, "which grew at a combined rate of 50%" in constant currency terms. Catz also said that acceleration "bodes well for another strong year in FY24."
Its core businesses are slowing down
In the first quarter of fiscal 2024, Oracle's total cloud services revenue (including Cerner) rose 29% year over year to $4.6 billion and accounted for 37% of its top line. Within that total, its software as a service (SaaS) revenue grew 17% year over year to $3.1 billion as its infrastructure as a service (IaaS) revenue increased 64% to $1.5 billion.
Just as in previous quarters, its SaaS growth was driven by NetSuite and Fusion ERP, while its IaaS growth was fueled by the expansion of OCI -- which continues to grow in the shadow of larger cloud platforms like Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud Platform.
Excluding Cerner, Oracle's cloud revenue also grew 29% year over year in constant currency terms to $4 billion, which met its prior forecast for 28%-30% growth but represented a slowdown from its 33% growth in the fourth quarter. On the same basis, it expects that deceleration to continue with 27%-29% year-over-year growth in the second quarter.
That slowdown seems fairly minor, but its license and support revenue -- which is lumped together with its SaaS and IaaS segments in its "cloud services and license support" segment -- faces fiercer macro headwinds as companies rein in their software spending. That core segment's revenue only rose 12% year over year to $9.5 billion in constant currency terms in the first quarter, compared to its 25% growth in the fourth quarter.
To make matters worse, Oracle's cloud license and on-premise revenue declined 11% year over year in constant currency terms to $809 million as its hardware revenue fell 8% to $714 million. In other words, Oracle's macro-induced weaknesses across its other businesses are gradually offsetting the stronger growth of its closely watched SaaS and IaaS businesses.
For the second quarter, Oracle expects its total revenue (including Cerner) to only rise 3%-5% year over year in constant currency terms and 5%-7% in USD terms. Analysts had expected its revenue to grow 8% in USD terms.
But its margins and profits are rising
Like many other enterprise software companies, Oracle is reining in its spending as its sales growth cools off. As a result, its adjusted operating margin rose by two percentage points year over year to 41% in the first quarter. It also continued its long tradition of buybacks with $150 million in repurchases throughout the quarter.
That's why Oracle still expects its adjusted EPS to grow 5%-9% in constant currency terms and 7%-11% in USD terms in the second quarter. That's in line with analysts' expectations for 10% adjusted EPS growth in USD terms.
Oracle's free cash flow (FCF) also grew 21% year over year to $5.7 billion during the quarter, giving it plenty of room for fresh buybacks and dividend hikes, and Catz reiterated her outlook for the company seeing "very good results" in its FCF growth for the full year.
Where will Oracle's stock be in a year?
Oracle trades at 20 times forward earnings and pays a forward yield of 1.3%. It's not a screaming bargain and its dividend won't attract serious income investors, but it could remain a safe haven play because business is relatively stable, its margins are rising, and it's generating plenty of cash. That said, I think it could still underperform the market over the next 12 months until its growth stabilizes, the macro environment improves, and its valuations become more attractive.
