Oracle Corp (NYSE:ORCL) continues to exhibit robust free cash flow (FCF), making it an appealing prospect for value investors, with the potential for a value increase of 10% or more. As of September 11th, the stock was trading at $126.73, marking a 12% increase from its low point on August 10th when it closed at $112.99.
The company’s strong FCF performance has also made it a popular choice for traders employing short-selling strategies.
Anticipating Oracle’s Financial Results
To put things into perspective, Oracle reported an impressive $8.47 billion in FCF generated from $50 billion in revenue for the last four quarters ending on May 30th. This resulted in a remarkable 16.9% FCF margin, with FCF levels showing a remarkable 68% year-over-year (YoY) increase.
Later today, on September 11th, the company is set to unveil its fiscal Q1 results for the period ending on August 31st. Investors and analysts alike will closely scrutinize the FCF margins, hoping for them to match or exceed the stellar results of the previous quarter.
At present, analysts are estimating revenues of $12.47 billion for the quarter ending August 31st, translating to an annualized revenue projection of $54.15 billion for the fiscal year ending May 2024. Assuming a 17% FCF margin for this revenue forecast, FCF could potentially reach $9.2 billion.
This figure would represent an 8.68% increase over the $8.47 billion in trailing 12-month (TTM) FCF reported in the last quarter.
Assessing Valuation
In light of these figures, a valuation assessment becomes feasible. For instance, as highlighted in my previous article, a 40x FCF metric for the stock is not implausible, resulting in a 2.5% FCF yield.
Consequently, by multiplying $9.2 billion in FCF by 40x, we arrive at a market capitalization estimate of $368 billion. As of today, the company’s market cap stands at $344.7 billion, implying a potential 7% increase in stock value if revenue projections remain steady.
However, should FCF margins improve and/or revenue estimates increase, the stock’s true value could exceed these calculations. This is why I contend that Oracle’s stock may be undervalued by at least 10%, potentially reaching $139.37 per share.
Benefitting from Shorting Out-of-the-Money Puts
Last month, we advocated for shorting puts with a strike price of $109.00 expiring on September 1st. Given that the stock closed above this level, the income from this short play was retained, and the puts were not exercised.
Given the elevated put premiums, it is reasonable to consider shorting another set of out-of-the-money (OTM) puts. For example, the $120 strike price puts expiring on October 6th are trading at $1.69 per put.
With this strike price positioned over 5% below the current stock price, it represents an attractive OTM opportunity. Moreover, the income generated from these short puts equates to 1.408% over just 25 days until expiration.
This means that if this strategy is repeated monthly for a year, the potential return could reach 16.9%. Combining this with ORCL’s 1.27% dividend yield, investors can enhance their income while awaiting the stock’s ascent to its true value.
In summary, Oracle’s stock not only presents an undervalued investment opportunity but also offers an income-enhancing strategy through shorting its OTM puts with near-term expirations.
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Author Faith Yakubu