Shares of Oracle fell sharply Tuesday, after lighter-than-expected quarterly sales raised concerns about the company's momentum for becoming a major cloud player. Oracle stock lost about 12% on the day.
Late Monday, the software giant reported adjusted earnings of $1.34 per share on sales of $12.9 billion for its fiscal second quarter ending in November. On average, analysts polled by FactSet expected Oracle to earn $1.33 per share on $13.1 billion in sales.
Oracle's revenue increased 5% from the same period last year while earnings increased 11%. Overall, revenue growth has slowed in recent quarters. Sales for Oracle jumped 18.5% year over year for the same November quarter in 2022 and then grew 18%, 17% and 9% for the quarters that followed. Notably, growth slowed further for the company's Oracle Cloud Infrastructure business designed to compete with AWS from Amazon and Azure from Microsoft.
"The lower OCI growth will worry investors, as this is the main investment story," Barclays analyst Raimo Lenschow wrote in a client note late Monday.
On the stock market today, ORCL stock sank 12.4% to close at 100.81.
Oracle Stock: Watching Cloud Push
Coming into earnings, Oracle stock had gained about 41% on the year. A growing group of analysts expect Oracle to seize on heightened interest in generative artificial intelligence to grow its cloud services business. Central to that effort is OCI, which hosts much of Oracle's generative AI offerings.
On that note, Chief Executive Safra Catz said in the company's earnings release that demand for the company's cloud infrastructure and generative AI service is "increasing at an astronomical rate." Catz says Oracle's remaining performance obligations climbed to more than $65 billion, exceeding annual revenue.
But revenue growth for OCI slowed for another quarter. Oracle Cloud Infrastructure revenue grew 52% year over year to $1.6 billion, the company said. Meanwhile, OCI sales grew 66% in the August-ending fiscal first quarter and 76% in the May-ending fiscal fourth-quarter. OCI is still growing at a much faster growth rate than the most recent quarters for Amazon Web Services and Microsoft Azure. But those companies have a significantly larger share of the market.
Oracle's overall cloud revenue grew 25% year over year for the latest quarter to $4.8 billion. For the August-ending quarter, cloud services revenues grew 30%. Cloud sales grew 54% in the May quarter.
Part of the challenge for the company, as it highlighted earlier this year, is building out the infrastructure for data centers to meet AI demand. That's driven in part by significant demand for graphics processing units, such as those made by Nvidia.
"The only limiting factor is our ability to get the data centers handed over and filled-up fast enough," Catz said on the company's earnings call Monday.
Analysts Lower Targets
On its earnings call, Oracle projected sales will grow between 6% and 8% for the current quarter. That includes revenue from Cerner, the health care industry software company that Oracle acquired last year. That was roughly in-line with the 7.5% growth expected by analysts heading into the report.
But Wall Street analysts appeared letdown by the results as a whole. At least nine brokerages lowered their price target for Oracle stock late Monday and early Tuesday, according to FactSet.
"While GPU constraints are an industrywide issue, two (quarters) in a row of go-live delays might have some investors begin questioning ORCL's competitiveness in terms of standing up a modern AI infrastructure," wrote UBS analyst Karl Keirstead. UBS maintained a buy rating but lowered its price target to 125 from 135.
Further, Evercore ISI maintained a buy rating but cut its target to 130 from 135 in a client note Tuesday.
"Our view is that if OCI growth can stabilize in the 50% range over the next few quarters, the risk/reward skews materially to the upside at current levels," wrote Evercore analyst Kirk Materne. But Oracle will remain in "show me mode" for most investors in the meantime, the note added.
Heading into earnings, Oracle stock closed at 115.13, up 1.3% on the day Monday. Further, the IBD Stock Checkup tool shows that Oracle had a Composite Rating of 83 out of a best-possible 99. The rating means Oracle stock currently outperforms 83% of all stocks based on fundamental and technical stock-picking criteria.
In addition, shares had a Relative Strength Rating of 81 out of 99, which measures how a stock's price performance over the last 52 weeks holds up against other stocks in IBD's database.
