After last night’s earnings miss, Oracle is getting pummelled this morning. As of this writing it’s down 13%.Here’s Canaccord’s Richard Davis on what happened last night. He downgraded the stock to hold from buy:
Oracle posted a substantial shortfall for a company that is typically quite predictable. We expect the shares to trade sideways for the next two to three quarters. This necessitates a downgrade to HOLD from Buy. Investment highlights
- Shortfall. In a surprise result, Oracle missed just about every income statement metric by 3-5% and EPS by $0.03 for its November quarter. Management indicated that it was pleased with its margins and was particularly excited about the firm’s hardware opportunity.
- Cause. The firm saw an elongation of sales cycles just as the quarter ended, particularly in the Americas and Europe. A decline in currencies, especially the Euro, produced a 3% revenue headwind.
- Management’s financial opinion (aka guidance). At the mid-point, Oracle is assuming modestly better than historical trend seasonality to hit numbers and a snap back in the weak results from application software sales. Management asserted that the quality of the firm’s integrated hardware/software stack is best-in-class and that added sales headcount will deliver purchase orders from a large pipeline.
- Outcome for ORCL. While logic should halt ORCL’s decline in the $26- 28 range (10x 2012E + cash), our experience is that stocks over-react to problems, especially at year end when few PMs will want to show ORCL in his or her portfolio. Our best guess is that this means $24-25 (-6%) because unless ORCL misses several times we believe it is unlikely that the shares will be revalued at a MSFT P/E of 7x, which would imply a $20-22 stock price.
Oracle so far this morning:
Photo: Yahoo Finance, with drawing by Business Insider
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