Oracle's Cloud Business Looks Lumpy But Strong Going Forward

JPMorgan said Oracle Corporation (NYSE: ORCL) is gradually moving past the trough of its transition to the cloud. However, the brokerage maintains its Neutral rating and $42 target price as the company is not “completely out of the woods” due to lower IaaS gross margins and EPS guidance miss.

Solid, 'Clean' Quarter Ahead

However, JPMorgan sees “increasing odds of a clean quarter in the near future” as management comments suggest the possibility of a solid third quarter for Cloud bookings and the company indicated that PF EPS growth could move back to double-digit territory next fiscal year.

Oracle reported quarterly revenue at $9.070 billion, marginally missing the consensus of $9.107 billion. But, non-GAAP EPS came in at $0.61, above the Street expectation of $0.60. On the guidance front, the third-quarter revenue outlook was slightly ahead of Street, while PF EPS forecast came in below the Street view.

Oracle has been a victim of IT consumption shifts to public cloud. The business software maker is in its early stages of transition to the cloud, but has already proven disruptive to certain legacy IT providers.

Analyst Commentary

Analyst Mark Murphy pointed out that though Oracle has tried to counter this rough weather via acquisitions and other architectural enhancements to its offerings, competitors such as salesforce.com, inc. (NYSE: CRM) and Workday Inc (NYSE: WDAY) have taken both mindshare and market share.

“Oracle’s dominance in database, high-margin maintenance streams, and ample resources to acquire should keep it competing for a long time, but it is difficult to know whether Oracle will end up on the winning or losing side of cloud computing,” Murphy wrote in a note.

At last check, shares of Oracle fell 3.92 percent to $39.26.

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