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Morningstar | Oracle Reports Decent 1Q; Relative Cloud Position Keeps Our Estimates Tepid; Shares Fairly Valued. See Updated Analyst Note from 17 Sep 2018

Oracle had a decent start to the fiscal year, although total reported cloud services and license support revenue growth was slightly disappointing. Similar to last quarter, the company reported healthy metrics for its database and NetSuite businesses, but our opinion of the firm’s cloud positioning and growth prospects remain tepid, especially when measured with competitors like Microsoft, Salesforce, and Workday. In the public cloud, we believe Oracle remains a laggard versus industry leaders such as Amazon and Microsoft, despite management touting the success of its autonomous cloud database product. We maintain our wide economic moat rating for Oracle and believe the firm can retain the bulk of its application software customers. With many on-premises customers still yet to move their back-office applications to the cloud, we see this as a moderate growth opportunity for Oracle’s application ecosystem business over the medium term. After slightly adjusting our model for the latest quarter and accounting for a modestly better application ecosystem outlook, we raise our fair value estimate to $49 per share from $46. With shares trading close to our fair value estimate, we’d seek a wider margin of safety before considering the stock for investment.

For the quarter, total revenue rose 1% year over year to $9.2 billion (up 2% in constant currency). Cloud services and license support revenue (72% of total revenue) grew 4% year over year in constant currency to $6.6 billion, buoyed by 7% application ecosystem growth. Meanwhile, cloud license and on-premises license revenue was flat at $867 million. With the reclassified revenue segmentation last quarter, Oracle’s individual cloud segment performance remains murky and it will be difficult to predict future performance, which gives us caution around its ability to compete with well-positioned peers.

In terms of the bottom line, the company expects double-digit EPS growth in fiscal 2019. We expect EPS growth to get close to this goal, but see the company relying on share buybacks as a considerable driver of this performance. In the first quarter, the company repurchased $10 billion in stock, and with additional $20 billion still authorized due to a new $12 billion authorization in the quarter, we expect continued buybacks as a way to boost EPS.