Oracle CEO Safra Catz says the company expects to nearly double cloud capital spending to almost $4 billion in fiscal 2022.
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Oracle
is in the middle of a major business overhaul, reinventing itself for the cloud. In a cover story four months ago, Barron’s highlighted Oracle’s progress, noting that investors had yet to give the enterprise software giant enough credit for the changes.
We wrote that Oracle (ticker: ORCL) was making clear progress in revamping both of its primary business pillars—applications and database software—while gaining traction in its push to build a public cloud business to take on market leaders
Amazon.com
(AMZN),
Microsoft
(MSFT), and
Alphabet
(GOOGL).
Oracle’s stock was simply too cheap, we wrote. Now, it’s a little less cheap. Oracle has been among the year’s best performing tech shares, with a gain of about 25% since our story, versus 1.4% for the
Nasdaq Composite.
The rally may not be over. Oracle could still surprise investors in the months ahead.
Last week, the company reported earnings for its fiscal fourth quarter ended in May 31, which showed fresh evidence of progress. Overall revenue grew 8%, to $11.2 billion—Oracle’s best quarterly growth rate since 2011 and ahead of the company’s forecasted growth range of 5% to 7%. Adjusted profits were $1.54 a share, ahead of the guidance range of $1.28 to $1.32.
Oracle reported strength across its application portfolio, with 46% revenue growth for Fusion ERP (financial software for large companies), 35% growth for Fusion HCM (human-resources software for large firms), and 26% growth for NetSuite ERP (financial software for small to midsize businesses). The company said its cloud infrastructure business grew more than 100%.
Not much to complain about there. Still, investors weren’t thrilled with the company’s outlook. On a conference call with investors, CEO Safra Catz said that Oracle expects revenue growth for the fiscal year ending in May 2022 to be better than in 2021, when the company expanded the top line 4%. But she also said that Oracle expects to nearly double cloud capital spending in fiscal 2022 to nearly $4 billion. The extra spending is weighing on profits. For the August quarter, Oracle sees adjusted profits of 94 cents to 98 cents a share, missing the Street forecast of $1.03 a share.
Oracle shares fell about 8% on the week to a recent $76.54.
The company’s view is that the cloud computing opportunity merits additional investment and more than makes up for any near-term weakness. Catz told Barron’s that the margin issues are temporary. “There is a lot of momentum in our cloud business, which delivered amazing bookings growth in the fourth quarter,” Catz wrote in an email. “As we look ahead to next year, we expect total revenue growth to accelerate further, based on more of our revenue coming from cloud, while our operating margins will be the same or better than prepandemic levels.”
At least one bullish analyst still found something to like in the report. “Oracle offers investors a high-quality, value play with the opportunity to capitalize on the company’s cloud transformation and increasingly attractive model,” wrote Monness Crespi Hardt analyst Brian White, while reiterating his Buy rating and $93 target price on the stock. “We would be buyers of the stock on any weakness.”
Oracle itself would seem to agree. The company bought back $8 billion of shares in the quarter, boosting its total for the past 12 months to $21 billion. While the stock isn’t as cheap as it was in February, this is probably still the beginning of the turnaround at Oracle, not the end.
Write to Eric J. Savitz at eric.savitz@barrons.com