Holding onto shares of Oracle Corporation (ORCL - Free Report) might not be a good option at the moment. Its shares have lost 0.27% in the past three months, underperforming the industry’s rally of 9.62%. Further, shares of Oracle went down more than 9%, yesterday, following its third-quarter fiscal 2018 results.
The decline stemmed from the soft cloud outlook. Cloud revenues including Software as a service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) are expected to grow between 19% and 23% (17-21% in constant currency), much lower than 32% (29% in constant currency) reported in the last quarter.
Oracle’s slowing cloud growth is indicative of an ominous outcome whereby the company might be completely overwhelmed by competitors. The company faces significant competition in most of its operational markets (database, applications, storage, cloud computing) from the likes of Dell-EMC, IBM, HP, Microsoft, Sybase, SAP, Salesforce.com, Workday and Teradata.
The trend toward consolidation is increasing competition for the company in most of these markets. To differentiate products here, large vendors are entering into alliances or partnerships to offer integrated and differentiating solutions. As a result, Oracle continues to face severe pricing pressure and lengthy sales cycles in its core business, which is hurting profitability. We note that the company is a late entrant in the field of cloud computing and consequently is expected to face tough competition going forward. This stiff competition is expected to hurt margins and will make revenue growth difficult, going forward.
Other Possible Troubles
We believe that Oracle’s business model transition will hurt revenue growth over the next couple of years. The company expects to gain a significant part of its revenues from SaaS compared with legacy on-premise licensing business. However, SaaS revenues will not be recognized upfront as in the case of license business, which will hurt top-line growth in the near term.
Further, higher investments on IaaS platform will affect gross margin expansion in the near term. Further, a strong U.S. dollar remains a headwind.
Total hardware revenues in the last reported quarter also slipped 3% (down 7% at constant currency) year over year to $994 million. Services revenues decreased 2% (6% at constant currency) to $796 million.
We believe that the ongoing transition to cloud will make it difficult for the hardware segment to perform well on a standalone basis. Although engineered systems are expected to drive growth, we believe that lower hardware volumes will continue to hurt top-line growth over the next couple of years. Moreover, hardware is significantly lower margin business that will keep margins under pressure, going forward.
Oracle is currently carrying a Zacks Rank #3 (Hold), but that could change if analysts revise their estimates to match the company’s slightly more upbeat earnings guidance. Improved analyst sentiment might kick start the stock after its post-earnings selloff, so investors should keep their eyes on that as a potential bullish indicator.
Nevertheless, ORCL has turned out to be a volatile stock recently, considering the aforementioned factors, it may not be a good decision to keep this stock in your portfolio, at least for now.
Few better-ranked stocks in the technology sector are NVIDIA Corp. (NVDA - Free Report) , Facebook, Inc. (FB - Free Report) and Paycom Software, Inc. (PAYC - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings estimates for NVIDIA, Facebook and Paycom Software are currently pegged at 10.25%, 26.51% and 25.75%, respectively.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>