Oracle Corporation (NYSE:ORCL) closed at $134.47 on October 15. The stock has returned -24.60% over the past 6 months, compared to a return of 15.4% for the Insider Monkey Billionaires Index and 11.4% for the State Street SPDR S&P 500 ETF Trust.
Oracle sells database software and, increasingly, the computing power that runs other companies’ artificial intelligence work. The second company is newer, much more expensive to start, and may be the reason the stock performed the way it did. The stock has lost 53.84% of its value over the past year. Despite this, 80% of analysts covering it still rate it as a buy, and their median target is 78.48% above the current price, according to CNN.
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What analysts are watching:
The company continues to grow rapidly. In the last quarter, revenue increased by almost a third and profits grew even faster. Nothing in these figures explains a drop in price of more than half.
What analysts evaluate is the order book. Oracle has signed contracts to provide long-term computing capabilities, and those commitments now total $638 billion for annual revenue well below that size.
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What the market is looking at:
These contracts must be constructed before they can be invoiced. Oracle’s own cash flow statement shows $75.66 billion in capital expenditures over the past year, compared to $46.94 billion in cash generated from operations. The company pays much more than it takes in.
Money is being borrowed, on a scale that has left Oracle with a different kind of balance sheet than it had before this build began. The disagreement is therefore not really about the existence or not of the orders. It’s about knowing what it costs to make them happen and whether the returns on all that spending come before borrowing becomes a problem.
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Two ways of reading the same company:
Shares trade at 17.76 times what analysts expect next year. For a company growing at this rate, neither that nor the 22.66 times what it earned over the past year are demanding, which is what makes the stock price so strange.
The two sides do not disagree on the facts. They set different prices for it. The first is to set the price of contracts won by Oracle. The other is to price the money spent to serve them. Both are interested in the same business, and neither is obviously wrong.
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