Here’s what investors selling Oracle on the company’s mixed quarter and lower guide are missing

Oracle (ORCL) shares declined more than 9% on Monday evening after the enterprise software company reported a mixed fiscal 2024 first quarter that showed robust growth in cloud services, offset by lukewarm numbers in some of the legacy parts of its business. A weaker-than-expected fiscal second-quarter revenue guide was also to blame for further pressuring the stock in after-hours trading. Revenue for fiscal Q1 — the three months ended Aug. 31 — increased 9% year-over-year to $12.45 billion, slightly missing the consensus analyst estimate of $12.47 billion, according to data compiled by LSEG, formerly known as Refinitiv. Adjusted earnings-per-share (EPS) of $1.19 grew 16% from the year-ago period and beat the $1.15 predicted by analysts. ORCL YTD mountain Oracle YTD performance While it’s not the quarter and guidance we were looking for, partly because of some headwinds at Cerner (an electronic medical records company Oracle paid $28.3 billion for in 2022), the outcome could be an example of when it’s more important to focus on what the company is saying about the long-term direction of the business rather than obsess over a couple of percentage points. Case in point, Oracle provided upbeat commentary around artificial intelligence spending on its second-generation cloud offerings, encouraging us to stay long-term bullish on the name. Bottom Line Market expectations around Oracle’s quarter had been building into Monday’s print, thanks in part to two upgrades by major Wall Street firms over the past couple of weeks, recommendations that helped shares close the regular trading session back near their all-time high close set in June. While the revenue miss didn’t help Oracle get over the high bar and some softness in guidance caused the stock to tumble further, we heard enough on the post-earnings conference call to remain positive on the fundamentals as the tech giant grows into its fiscal 2026 financial goals. Oracle said at its Financial Analyst Day in October 2022 that it’s targeting $65 billion of total organic revenue, 45% operating margins (including Cerner), and more than 10% annual EPS growth for fiscal year 2026. One reason why we think Oracle will achieve these figures is the amount of new business that it’s getting and will continue to get from generative AI. It started in the press release, with Chairman and CTO Larry Ellison saying, “As of today [Monday], AI development companies have signed contracts to purchase more than $4 billion of capacity in Oracle’s Gen2 Cloud. That’s twice as much as we had booked at the end of Q4,” the quarter that ended its 2023 fiscal year. Then, CEO Safra Catz echoed the bullishness right at the start of the conference call when she said that “customer momentum is continuing to build. This momentum is turning into bookings, and that gives me the confidence that our annual revenue growth will continue to accelerate moving forward.” These bullish comments — taken together — made the softer fiscal second quarter guide all the more puzzling. But for now, we’re chalking up the revenue growth softness to some lumpiness around one quarter to the next. To be sure, though, we’ll be listening in to next week’s Oracle CloudWorld event for more partnership details and the associated financial analyst meeting to see if management can restore confidence. With the stock back trading at less than 22x earnings, we’ll continue owning Oracle as one of the cheaper AI beneficiaries in the market. We started our position in Oracle on Aug. 15 and added to it three days later. If the after-hours move holds into Tuesday’s trading, the stock price would be right around our cost basis. While we contemplate our next move, this might be the kind of decline worth buying if you’re not in the stock already. Quarterly Commentary Quarterly total cloud services and license support revenue (seen in the Segments section of the above earnings grew 12% to $9.5 billion, driven by strategic cloud applications, Autonomous Database, and the Oracle Cloud Infrastructure (OCI). This segment now accounts for roughly three-quarters of Oracle’s total revenues, an important feature since it is a highly predictable and highly profitable revenue stream. As the business grows and becomes a large part of the Oracle pie, margins lift higher and cash flow increases. To this point, adjusted operating margins expanded 150 basis points (as seen in the Companywide section). Total cloud revenue, excluding Cerner, increased 29% year over year to $4 billion, and with Cerner included total cloud revenue was also up 29% to $4.6 billion, split with Infrastructure as a Service (IaaS) revenue growing 64% in constant currency to $1.5 billion and Software as a Service (SaaS) revenue up 17% to $3.1 billion. Oracle’s IaaS business is growing much faster than peers like Microsoft Azure, Amazon Web Services, and the Alphabet -owned Google Cloud. Part of the reason is that it’s smaller and therefore less of a victim to the law of large numbers. However, there are also performance, cost, and security advantages that Oracle management repeatedly touts. Oracle had several customer wins in the quarter, including AI startup Cohere and more established companies such as First Solar , Johnson Controls , and MGM Resorts . One way Oracle is keeping costs down in its data centers is by having them automated. “Our data centers are 100% automated. They configure themselves. They run themselves. We don’t have a lot of labor. Now that saves us a huge amount of money, a lot of labor cost is saved. But the biggest advantage is if you don’t have human beings involved, you don’t have human labor, you don’t have human errors. You don’t have mistakes. You can ensure security,” Ellison explained on the call. One potential gatekeeper behind Oracle unlocking more growth is supply. The company said its biggest challenge right now is building data centers fast enough to keep up with demand. Given the demand Oracle is seeing and what it believes it has in the pipeline, Oracle expects capital expenditures in this current fiscal year 2024 to be similar to the past year’s figure, which was about $8.7 billion. This implies Oracle will be spending nearly half a billion more than the $8.3 billion the consensus had expected. Guidance Oracle’s weaker-than-expected fiscal 2024 second quarter guide caused shares to drop a second leg lower after the closing bell Monday. Katz said total revenue, including its acquisition of Cerner, is expected to grow 5% to 7% in U.S. dollar terms at Monday’s foreign exchange rate, implying revenue of about $13 billion. This implied figure is below expectations of about $13.28 billion, which would reflect growth of about 8.2% year over year. This is a disappointment relative to management’s past comments about delivering revenue acceleration for the year, but Catz said Monday evening there may be small fluctuations from quarter to quarter. In addition, Oracle is accelerating the transition of Cerner to its cloud, resulting in some near-term headwinds to its growth rate as customers move from license purchases to cloud subscriptions. If you back out Cerner, to get a closer view of how the mainline business is growing, total revenue is expected to grow 8% to 10%. Within that figure, Oracle expects cloud revenue to increase 29% to 31%, which at the midpoint is about stable from the first quarter. On the earnings side, Oracle expects adjusted EPS to grow 7% to 11% year over year to between $1.30 and $1.34. This midpoint of $1.32 is slightly below the consensus estimate of $1.34. (Jim Cramer’s Charitable Trust is long ORCL, MSFT, AMZN, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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