Oracle’s last earnings release started with a celebration and ended in disaster. Its Wednesday earnings report should work out a whole lot better.
Most investors would probably prefer to forget what happened just about three months ago. Oracle stock initially surged 36% when the company said that its bookings had grown by 359%. Then everyone realized that most of that number came from one customer—OpenAI—which may or may not be able to pay for everything it has ordered. Shares have dropped 35% since then to $214.
The drop has coincided with analysts reducing their earnings estimates, in large part because of the higher interest and depreciation expense that comes with the tens of billions of dollars of borrowings and capital investments Oracle has to make to build data centers to provide the artificial intelligence-driven data storage software its customers, including OpenAI, need. If that money never materializes, the company has a big problem.
That OpenAI uncertainty makes it hard to predict where Oracle stock will go over the long term. For now, though, its fiscal second-quarter earnings, which will hit the wires after the market closes on Wednesday, provide an opportunity to prove that the company is on a high-growth path, without having to show any demand from OpenAI, as the contract doesn’t start until 2027.
Analysts forecast Oracle’s total sales to grow by 15% to $16.2 billion, according to FactSet, powered by its cloud-based and AI-driven offerings. Its older, more outdated software isn’t really growing anymore, but the company is signing up new corporate customers for its highly efficient AI product. The cloud infrastructure segment grew 55% in the first quarter, and is expected to grow at a similar rate in the second quarter.
The sales should translate to earnings of $1.64 a share, for a growth rate of about 12%. That’s lower than the revenue growth because the newer AI business carries lower profit margins and is becoming a larger portion of the business. But the market has well understood that for a while. It’s still the key ingredient in the overall growth story, and could very well become more profitable over time. Earnings could demonstrate that there is strong demand for Oracle’s AI offerings, even without OpenAI.
That’s why, when it comes to the stock, “we view current weakness as a buying opportunity ahead of its second quarter print in December,” writes Mizuho Securities analyst Siti Panigrahi.
Traders can cue off recent technical signals. The stock has risen from a low of $198, somewhat of a key level, given that it’s roughly the $200 area where buyers stepped in at the end of June to send the stock higher. Now the stock is a touch over its $211 200-day moving average, which has trended upward over the past three years. As long as the earnings picture doesn’t darken, shares should rise.
It doesn’t take an oracle to see there just might be an opportunity in Oracle.
