Before the market opened on Tuesday, Oracle stock (NYSE:ORCL) was up about 3%. This was due to strong growth in the cloud, which aided the tech giant’s earnings in the second quarter. However, some Wall Street analysts are concerned about the company’s free cash flow.
Morgan Stanley Analyst Gives Price Target of $90
According to Morgan Stanley analyst Keith Weiss, the company “continues to defy a weakening macro backdrop.” Oracle stock is rated equal weight by him, and his price target is $90. He stated that the company’s revenue growth is “accelerating,” and that its license and hardware businesses are performing exceptionally well.
On the other hand, the cloud infrastructure business’s expenses continue to rise, which hurts free cash flow growth and should be monitored by investors.
Weiss told clients in a note that “further increasing capex spend in service of the [Oracle Cloud Infrastructure] business continues to put pressure on Oracle’s free cash flow,” despite the company’s strong second-quarter revenue and bookings.
The free cash flow for the quarter was $1.586 billion, compared to $8.395 billion the previous year. This represents an 18% increase over last year, but it is “significantly less” when the lawsuit settlement from last year is taken into account.
Weiss also stated that, despite cloud’s success throughout the quarter and the positive third-quarter estimate, fiscal 2023 might not be as consistent as fiscal 2022.
According to Weiss, “bottom-line, with investors expecting big Cloud deals (which happened), aggressive expense cuts at Cerner (which will take time), and a durable back-office application story (which has been consistent), to yield upside in Q2, coming out of the quarter with flat Cloud revenues and no change in [fiscal 2023] earnings may be a bit disappointing.” However, given the resulting margin, “That being said, Oracle is putting up more proof points around the sustainability of double-digit [constant currency] topline growth,” such as “mid-teens organic [constant currency] cRPO growth” and “Oracle Cloud Infrastructure” momentum.
Oracle expects to generate $12.42 billion in revenue in the third quarter. This estimate was provided during the company’s earnings call. When one-time items are factored in, earnings per share are expected to range between $1.17 and $1.21.
Brad Sills, a Bank of America analyst with a neutral rating and a price target of $95 on the cloud, is bullish on its future performance. Concerns have been raised about free cash flow, which the analyst believes will grow at a rate of -2% per year over the next five years.
Oracle Stock: Q2 Results Were Generally Solid
According to Karl Keirstead, an analyst at UBS, the second-quarter results were “generally solid,” despite the fact that the economy was not doing well. Because of how well the organic growth went, this evaluation was possible. However, the market for software as a service has deteriorated slightly. Because margins and free cash flow are under pressure, it is critical to keep an eye on this segment.
“The $2.4 billion in capital expenditures (which is significantly higher than our $1.7 billion estimate and is likely to remain at this level) is materially reducing cash flow,” Keirstead said. The analyst now believes that annual adjusted profits per share will be $4.87, which is lower than their previous estimate ($4.89). They also believe the free cash flow will be $7.4 billion, which is less than their previous estimate ($11 billion).
Oracle was awarded a portion of the $9 billion Joint Warfighting Cloud Capability contract awarded by the US Department of Defense last week. Many experts in the field were taken aback by this.
Featured Image: Unsplash @ BoliviaInteligente
