Oracle Corp. (ORCL, Financial) topped the charts on Friday, at one point booking a gain of 16% for the day to trade around $102.80 per share:
This comes after strong gains in the past couple of years. Year to date, shares of Oracle have returned 61% and the cumulative return over the past two years is 84%.
While the price-earnings ratio is a modest 21.86, which is below the median for the software industry, Oracle has averaged a price-earnings ratio of around 17.99 over the past decade, which is why the GF Value chart rates the stock as significantly overvalued.
With the stock already trading at elevated levels, some investors were surprised at first to see it spike on Friday despite the news the company reported a negative bottom line for its second quarter of fiscal 2022. However, digging under the surface, it becomes clear why the stock had such a great run.
Oracle actually recorded an earnings beat
On a GAAP basis, Oracle reported a net loss of $1.25 billion, which translated to a loss per share of 46 cents. However, this loss was mostly related to the payment of a judgment related to a 10-year-old dispute surrounding the employment of former CEO Mark Hurd.
On a non-GAAP basis, after adjusting for the dispute payment, Oracle’s earnings per share rose 14% year over year to $1.21, easily surpassing analyst expectations of $1.11. The company also recorded revenue of $10.36 billion compared to Wall Street’s prediction of $10.21 billion.
An unusual illusion of value
The discrepancy between Oracle’s GAAP and non-GAAP earnings per share may have created a sort of illusion that by getting in quick, investors could realize a quick profit once the market reassessed Oracle’s stock price using the non-GAAP earnings beat instead of the GAAP loss.
Those following this line of thinking weren’t necessarily wrong. The announcement of the settlement of the CEO dispute came in advance of Oracle’s earnings report, which may have contributed to the stock’s slight loss throughout the trading day on Thursday.
However, those looking for an earnings arbitrage opportunity may have underestimated how quickly the market would reassess the stock’s value. Shares jumped more than 16% to pass the $103 mark before slumping back to $100 overnight and then trading back up again.
Attractive outlook
Above and beyond the perceived arbitrage opportunity, Oracle’s growth strategy impressed Wall Street and individual investors alike, causing them to be willing to attribute a higher price to shares.
Oracle is accelerating its cloud growth, with sales in its infrastructure and applications cloud businesses clocking impressive growth of 22% year over year. The company estimates that cloud revenue is on track to surpass $10 billion in full fiscal 2022.
“These strong results are being driven by the 22% growth of our infrastructure and applications cloud businesses which are approaching $11 billion in annualized revenue,” CEO Safra Catz said. “We now have 8,500 Fusion ERP customers with revenue growing 35%, 28,400 NetSuite ERP customers with revenue growing 29% and our Gen2 infrastructure businesses are growing even faster—and accelerating.”
The company is also focusing on increasing its shareholder returns, declaring a $10 billion increase in its share repurchase authorization as well as a quarterly dividend of 32 cents, which is in line with the previous payment and marks a forward dividend yield of 1.25%.
The chart below shows the history of Oracle’s year-over-year growth in earnings per share without non-recurring items (on a trailing 12-month basis).
As we can see, Oracle’s growth has been accelerating, and the company is promising higher growth as well as higher shareholder returns. In light of this, the sudden upward correction isn’t that surprising, and Oracle is still trading below the valuations of many cloud growth players.
