Is Oracle’s Stock Overvalued?

ORCL: Oracle logo

At the current price near $64 per share, we believe Oracle’s stock (NYSE: ORCL) has reached its near term potential. ORCL stock has risen 19% in FY 2021 (FY ends in May) compared to the S&P 500 which has increased by 22% in the same period. Oracle saw revenue rise by 2% in the first 2 quarters of FY 2021. For Q2 2021 (ended Nov 2020) revenue nearly rose by 2% to $9.8 billion while earnings improved to $0.82 compared to $0.71 in the same period of the previous year.  The company has seen earnings rise over the recent years, while its P/E multiple has been fluctuating. We believe the stock has reached its near term potential. Our dashboard ‘What Factors Drove 39% Change In Oracle Stock Between 2017 And Now?‘ provides the key numbers behind our thinking.

The 42% rise in ORCL stock price from FY 2017 to now is justified by a significant rise in earnings during those years. Oracle’s revenue rose from $37.8 billion in FY 2017 (ended May 2017) to $39.1 billion in FY 2020 (ended May 2020). Net Income margin increased from 25% in FY 2017 to 25.9% in FY 2020. On a per share basis, earnings went up from $2.30 to $3.16 helped by a 22% decrease in shares outstanding.

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During the same period, the P/E multiple fell from 19.9x to 17x. The P/E improved in 2020 and is currently at 20.2x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Oracle’s revenues and earnings grew in the first half of FY 2021. Revenues for the first half were up 2% to $19.2 billion compared to $18.8 billion in the same period of the previous year. EPS meanwhile was recorded at $1.56 compared to $1.36 for the same period of the previous year. The rise was primarily due to a shift to Cloud services by various organizations across the world.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on FY 2022 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. As per Oracle’s valuation by Trefis, we have a price estimate of $66 per share for ORCL’s stock, similar to its current level.

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See all Trefis Price Estimates and Download Trefis Data here

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