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Is Oracle (ORCL) Stock's Place in Your Portfolio Justified?

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At times, it is prudent to hold on to certain stocks that have enough potential but are weighed down by tough market conditions. Oracle Corporation (ORCL - Free Report) seems to be one such stock, which investors should retain if they are looking to reap long-term benefits. Though the stock is facing a few headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long haul.

In fact, Oracle stock has gained 17.8% in the last three months, outperforming the industry’s rally of 14.2%.

Factors in Favor of Oracle

Oracle’s non-GAAP earnings of 71 cents per share in first-quarter fiscal 2019 surpassed the Zacks Consensus Estimate of 68 cents. Earnings increased approximately 16.4% from the year-ago quarter (up 19% in cc). Further, revenues increased 1% year over year and 2% in cc which was within management’s guidance of 1-3%.Oracle’s top-line benefited from the ongoing cloud-based momentum.

Oracle recently released Java Special Edition (SE) version 11 or Java Development Kit (JDK) 11. Notably, the new Java version is compatible with advanced secure Internet protocols and cryptographic standards of HTTP/2 and TLS 1.3, to name a few.

The company is anticipated to gain investors’ confidence with the latest release of Java SE 11. Java has been a favorite among software developers, application builders for quite a long time.We believe the new LTS release of Java 11 loaded with robust features, positions Oracle well to sustain the dominance it enjoys in the software programming market.

Further, the next-generation autonomous database launched by Oracle, which is supported by machine learning, is now available. This is a key catalyst for the company. Management believes that the new database will improve Oracle’s competitive position in the cloud against Amazon Web Services (“AWS”).

From a valuation perspective, the stock looks attractive as it currently trades significantly lower than the industry average based on a forward earnings estimate. This signifies huge upward potential. Oracle currently trades at a forward P/E of 15.2x compared with the industry group average of 100.9x.

The company has an expected EPS growth rate of 9.8%. Notably, the stock has delivered positive earnings surprises in the trailing four quarters with an average beat of 6.9%.

Risks Persist

Stiff competition in the cloud is expected to hurt margins and hinder revenue growth. Notably, Oracle has undergone structural changes. It no longer intends to break out its cloud revenues and does not provide any guidance on SaaS, Cloud PaaS and IaaS. This move is likely to enhance investor concern about the company's outlook.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors hold on to the stock for the time being.

Key Picks

Salesforce.com Inc (CRM - Free Report) , KLA-Tencor Corporation (KLAC - Free Report) and Apple Inc. (AAPL - Free Report) are a few better-ranked stocks in the same sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Salesforce, KLA-Tencor and Apple have a long-term earnings growth rate of 25%, 9.8% and 9.7%, respectively.

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