QVML - S&P 500 Earnings And An Oracle Earnings Preview

2023-09-11 15:30:00 ET

Summary

• With an approximate $342 billion market cap, ORCL is the 35th largest company in the S&P 500 when ranked by market cap.
• The emergence of the cloud represented both a risk and an opportunity for Oracle in the early part of the last decade.
• S&P 500 earnings data will slow markedly over the next 5 weeks, until the big banks and financials start reporting around October 10th, '23.

Oracle ( ORCL ) is another large-cap technology software company that will report their fiscal Q1 '24 financial results after the closing bell on Monday, September 11th, 2023. With an approximate $342 billion market cap, ORCL is the 35th largest company in the S&P 500 when ranked by market cap, and the stock represents 1/2 of 1% market cap weight in the SPY.

Coming into Monday's night release, analysts' consensus is expecting $1.15 in earnings per share on $12.46 billion in revenue for expected year-over-year (y.y) growth of 12% and 9%, respectively. Operating income per consensus is expected at $5 billion and is also expected to grow 12% y.y. (consensus estimates are sourced from IBES data by Refinitiv.) Briefing.com consensus estimates show the exact same consensus expectations coming into Monday's release.

Last quarter, fiscal Q4 '23 (ended May '23), which is typically Oracle's strongest quarter of the year, revenue grew 17%, operating income +10%, and EPS +8%. Cloud infrastructure growth accelerated, per a number of sell-side reports while Morningstar noted that Oracle's cloud business is likely capped, despite the fact that, in the same note, Morningstar noted that "consumption of Gen2 cloud infrastructure is now 7x larger than it was in 2020."

The interesting aspect to this is that - despite all the AI chatter and excitement - Oracle is still benefitting from the cloud transition, although it's unlikely they will ever get close to Amazon Web Services (AWS).

One big issue with Oracle:

When this article was written and posted to Seeking Alpha last June '23, it noted the comparison of cash flow to net income for Oracle and how it lags Microsoft's cash flow generation.

Here's an updated spreadsheet showing the comparison:

Since I believe "capex" should include acquisitions, and Oracle's latest acquisition of Cerner will necessarily result in free cash flow being impacted for several quarters, looking at "pre-Cerner" Oracle's free cash flow never covered net income even well before Cerner. Mathematically, Oracle's free cash flow averaged 78% of net income from August '22 (last quarter pre-Cerner) all the way back to May '17.

Here's Microsoft's same cash flow to net income comparison:

Microsoft clearly has a higher ratio to cash flow to net income over time, and while free cash flow to net income is as lumpy, Microsoft's healthier than Oracle's when it's positive.

This may seem like an innocuous statistic or measurement, but it speaks to "quality of earnings" particularly for software companies, which are very "capex light" and should be cash flow rich when they are not making acquisitions.

Stock performance:

Since Jan 1, 2000:

• ORCL: 6.35% annualized return
• SPXTR: 6.85% annualized return for S&P 500
• MSFT: 7.56% annualized return

Since Jan 1, 2010:

• ORCL: 12.34% annualized return
• SPXTR: 12.95% annualized return
• MSFT: 18.97% annualized return

(Annual return data sourced from YCharts)

Oracle summary/conclusion: The emergence of the cloud represented both a risk and an opportunity for Oracle in the early part of the last decade (2010 to 2019), and Oracle pivoted to the cloud (not without some issues) and you'd think they will again be forced to pivot towards AI to some degree, which puts further distance between the changing technology landscape, and its core stand-alone, desktop, database origins.

If large-cap tech does well, as it has in 2023, and if the recovery from 2022's so-called bear market which was really just a needed correction, Oracle should perform well and roughly in line with the S&P 500 as the above data shows.

There has been a lot of bullish commentary of late around the stock coming into Monday night's earnings. Trading at 22x expected fiscal '24 EPS of $5.57, with an expected 9% EPS growth in fiscal '24, Oracle's multiple is in line with historical values. Expected 3-year average EPS growth of 12% and expected average 9% revenue (over the next 3 years) is being helped by Cerner.

As a general rule, I like Morningstar Research, and Morningstar puts a "fair value" on Oracle of $76 per share, meaning per Morningstar's valuation methodology, Oracle is trading at a 65% premium to fair value. Morningstar will likely have to raise their fair value estimate, particularly after the Cerner acquisition, but Oracle's history of heavily dilutive acquisitions and their history of lagging major or secular shifts in enterprise software tends to leave those who have followed the company for 25 years a little - how shall we say - restless.

Oracle chased the cloud, made a lot of noise about it from 2012 to 2018, but revenue growth for that 7 years (inclusive) averaged just 1% for those years, and then Oracle changed up their disclosure and stopped the cheerleading around "cloud". Like IBM did with Watson, Oracle hyped cloud, and yet the overall numbers never really grew, and then it went quiet. Big, heavily dilutive acquisitions drive the Oracle bus, and with Cerner, Oracle has added $36 billion in long-term debt since November '19 and term debt now totals $86.4 billion as of May '23. (That's a lot of debt...)

It's funny when the above-linked article (5th paragraph above) was published on Seeking Alpha in June 23, Jim Cramer came out and bulled the stock on Mad Money that night, and the stock was trading around $115-116 if memory serves. I was hanging around the office working late and saw the Oracle graph on CNBC's Mad Money. Jim probably knows as well as anyone, if you study Oracle's history, if large-cap tech in general does well, and if enterprise software specifically performs well, Oracle will trade with those segments, despite these quality differences cited above.

What's interesting is that, looking at the past year of Oracle EPS and revenue revision data, fiscal 2024's EPS estimate has seen negative revisions of 5% since August '22, while revenue revisions are up 2% over the last 12 months or since August '22.

Just know what you own.

S&P 500 data:

• The forward 4-quarter estimate (FFQE) slipped by $0.02 this week to $233.38 from last week's $233.40 and represents the first sequential decline in the FFQE since July 21 '23.
• The S&P 500 P/E ratio ended this week at 19.1 versus last week's 19.35x.
• With the S&P 500 falling 1% this week, the S&P 500 earnings yield jumped to 5.24% from last week's 5.17%, the highest "EY" since August 18 '23.
• The EPS "upside surprise" stands at 7.9%, even better than Q1 '23's results, while the revenue upside surprise per Refinitiv is +1.7%.

S&P 500 earnings data will slow markedly over the next 5 weeks, until the big banks and financials start reporting around October 10th, '23.

The revisions will likely be modest, with a downward bias at this point in the quarter since the typical pattern is that with fewer earnings releases, there are simply fewer revisions and activity, and thus towards the end of each quarter, there tends to be a negative bias to forward estimates as activity dries up. Negative or positive preannouncements can drive revision activity, but the relatively solid state of the US economy has led managements to limit their disclosure to earnings releases.

Summary/conclusion: Oracle could influence large-cap technology trading early next week, after the earnings release Monday night. S&P 500 earnings activity remains a positive since mid-July '23, although it will slow as we near the end of Q3 '23. August CPI and PPI data are scheduled to be released Wednesday and Thursday of this coming week, September 13th and 14th '23.

Take all of the above with a healthy skepticism, since none of this represents advice and is really just one market opinion. Past performance is no guarantee of future results. Capital markets can change quickly for both the good and bad, and readers should evaluate their own comfort level with market volatility and adjust accordingly. All S&P 500 EPS and revenue data is sourced from IBES data by Refinitiv, and all historical Oracle and Microsoft data is sourced from internal valuation models dating back to the mid-1990s.

Thanks for reading.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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