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Oracle Stock: Valuation Caps Upside?

Enterprise software products and services provider Oracle Corp. (ORCL) announced mixed Q1 results. The company delivered better-than-expected Q1 earnings. However, revenues fell short of the Street’s estimates. (Read more: Oracle Delivers Mixed Q1 Results; Shares Dip 1.7%

Nevertheless, Oracle expects its Q2 earnings to be between $1.09 and $1.13, higher than analysts’ expectations of $1.08. Further, it projects its cloud services and license support revenue to increase by over 5% in Q2 and then accelerate through the second half of the fiscal year.

Despite a better-than-expected EPS outlook and momentum in its cloud business, Oracle failed to lift investors’ sentiment, while its stock is trending lower in Tuesday’s premarket trade. 

In response to Oracle’s Q1 performance, Jack Andrews of Needham stated that “although we believe ORCL’s growing cloud business grants the company better leverage to realizing an overall growth acceleration, we believe the stock’s recent advancement fully reflects the traction from these efforts and remain on the sideline given historically high valuation multiples.”

Notably, Oracle stock is up over 39% this year. (See Oracle stock charts on TipRanks)

Further, its NTM (next 12-month) EV/Sales (Enterprise Value/Sales) multiple of 6.8 is well above the three-year historical average. Also, its NTM P/E (Price/Earnings) multiple of 18.8 is at a multi-year high. I maintain a Neutral outlook on Oracle stock.

While Andrews sees “favorable qualitative cloud trends,” the 5-star analyst remains sidelined until he sees further momentum in organic sales across its cloud businesses. 

Further, Andrews added that the “data from the early adopters of autonomous DB (database) suggest that ASPs (average selling price) and customer sizes are smaller, which could result in a longer-time to reach materiality.”

On TipRanks, ORCL stock has a Hold consensus rating, based on 4 Buys, 13 Holds, and 2 Sells. The average Oracle price target of $84.81 implies 4.6% downside potential from current levels.

Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.

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