Oracle Stock Rebounded Due to Solid Q3 Earnings, Share Buybacks

Oracle (NASDAQ:ORCL) stock rose by double-digits during the trading session on March 13. The company reported upbeat earnings on March 12 after the market bell. The stock was trading over 13% as of 11:17 AM ET on March 13.

The stock price gained after Oracle’s biggest decline since 2017. Notably, the stock fell around 11% on March 12 and closed at $39.80. The stock also hit its 52-week low of $39.71 on the same day due to rising fear about the virus. As of March 12, Oracle has a market capitalization of $142.5 billion. So far, the stock has declined by around 24.5% year-to-date.

Earnings in detail

Oracle posted better-than-expected numbers in the third quarter of fiscal 2020 (ending February 29, 2020). The company reported an adjusted EPS of $0.97 in the third quarter, which beat Wall Street’s estimates of $0.96 per share. The adjusted earnings also grew 11% YoY (year-over-year) due to the higher operating income and share count following share repurchases. On a constant currency basis, the adjusted earnings rose 12% YoY in the third quarter. The company saw double-digit earnings growth for the fifth consecutive quarter.

The adjusted operating income increased by 2% YoY to $4.4 billion. The operating margin was almost the same at 44% in the quarter.

Oracle stock gained on share buybacks

Due to strong cash flows, Oracle has been rewarding its shareholders through cash dividends and share buybacks. At the end of the third quarter, Oracle’s cash flow from operations was $13.9 billion, while its free cash flow was $12.4 billion. During the quarter, the company has increased the share repurchase authorization by $15 billion.

Oracle’s board also declared a quarterly cash dividend of $0.24 per share for its shareholders. The company will pay its dividends on April 23 to shareholders on record as of April 9. Oracle has an annual dividend of $0.96 and a dividend yield of 2.15% as of March 12. The dividend payout ratio was 24.69%. Meanwhile, IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) also pay dividends regularly. They have yields of 6.30% and 1.33%, respectively.

Revenues

Oracle’s revenues were $9.80 billion in the third quarter, which beat analysts’ expectations of $9.75 billion. The revenues were 1.9% YoY higher from $9.6 billion in the same quarter last year. Excluding the currency impact, the revenues increased 3% YoY in the third quarter. According to a MarketWatch report, this was Oracle’s highest revenue growth in nearly two years. The company’s revenue growth mainly came from cloud service demand amid the global economic slowdown due to the coronavirus outbreak.

Oracle has been focusing on growing its cloud computing business amid heightened competition. Currently, companies are shifting from the traditional on-premise model to the cloud.

In the third quarter, the revenue from cloud services and the license support segment rose 4% YoY to $6.93 billion. The revenue was well above analysts’ expectations of $6.90 billion. However, cloud license and on-premise license segment sales fell 1.6% YoY to $1.23 billion in the third quarter. The company signed fewer new software deals. Meanwhile, the cloud license and on-premise license segment also beat analysts’ forecast of $1.19 billion.

The company’s hardware and services segments didn’t meet Wall Street’s numbers. The numbers were also down from the same quarter last year. While hardware sales were down by 6%, the services division declined by 1% in the quarter.

Q4 guidance

For the fourth quarter, Oracle CEO Safra Catz expects “uncertainty” amid the coronavirus epidemic. The company expects its May-ending sales to range from a decline of 2% to a gain of 2%. Analysts expect sales of $11.1 in revenue, which implies a drop of 0.29% YoY.

Oracle also expects an adjusted earnings of $1.20–$1.28 for the fourth quarter. Analysts expect an adjusted EPS of $1.22—up by 5.2% YoY.

Analysts’ recommendations on Oracle stock

Among the 34 analysts covering Oracle stock, nine recommend a “buy,” 21 recommend a “hold,” and four recommend a “sell.” Currently, analysts have given a 12-month target price of $50.38 on Oracle stock, which is at a 10.1% premium to the current stock price.