Oracle Corp (NASDAQ:ORCL) co-founder and CEO Larry Ellison may only make a nominal $1 annual salary, but he holds 1.1 billion shares of ORCL stock. So when shares sank more than 8% on Thursday, or $3 apiece, the billionaire saw a big chunk of change go up in smoke.
As did the rest of Oracle shareholders.
The tumble was caused by disappointing third-quarter revenue, particularly on new software segments that the company said were plagued by poor sales execution by new staffers. The Oracle earnings were ugly enough, but that excuse seemed to spook the Street even more and sent shares tumbling.
Furthermore, forecasts were for as much as 11% growth in new software licenses and subscriptions for the current quarter, but the miss is triggering a host of downgrades to outlooks as well as stock price. Credit Agricole reduced its rating on Oracle to “underperform” from “outperform” and cut its share target price to $35 from $38. Evercore Partners cut its rating to “equal-weight” from “overweight.”
The miss comes at a poor time for Oracle, as it faces greater competition in cloud computing software from giants like IBM (NYSE:IBM) and SAP (NYSE:SAP) as well as upstarts that include Salesforce.com (NYSE:CRM).
Oracle is hardly going bankrupt here, with a dominant enterprise software business, almost $40 billion in annual sales and a wildly profitable business. Oracle also just announced in February it will shell out $2 billion for Acme Packet (NASDAQ:APKT), a developer of technology to improve the transmission of data across the Internet, to further expand its reach.
But the overall slowdown in corporate IT spending is tough to swim against, even if the sales force at Oracle were top-notch. Europe continues to be a drag, and you can bet Cyprus fears won’t change that anytime soon.
Furthermore, tough competitors like Workday (NYSE:WDAY) continue to show they aren’t intimidated by larger players like Oracle and are eager to disrupt. Acquisitions, including the recent Acme Packet deal, have helped ORCL keep pace and cross-sell its massive customer base. But you can’t buy your way to growth forever.
Oracle may be too hot to handle right now thanks to internal struggles with its sales force and the continued slowdown in enterprise spending. There may be an opportunity to get in and play a secular recovery in business spending, but now does not seem the time … especially considering the forward P/E is about 13 after this selloff, which remains on par with Microsoft (NASDAQ:MSFT) and IBM — two companies that face very similar challenges in the overall environment.
Oracle isn’t that cheap, and it isn’t growth right now. That means it isn’t a buy.
- Jeff Macke warns that the Oracle miss, coupled with a bad Fedex (NYSE:FDX) report, bodes poorly for earnings season. (Breakout via Yahoo Finance)
- One analyst thinks ORCL will turn around quickly, however. (CNBC)
- Overall U.S. IT spending should grow only 6% this year. (IDC)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.