Oracle Earnings Preview

Oracle is the smallest of the publicly listed companies commonly classified as “hyperscalers.” Even though Oracle is the smallest player in the segment, management clearly has no intention of accepting smaller “AI” investments, which is reflected in the valuation.

ORACLE stock chart (D1)

Since the start of the year, at the low of the correction, the sell-off reached as much as about 54%. After the rally that began in July (around 40%), the valuation is still about 36% below the peak. Source: xStation5

Second-quarter results, while a positive surprise on revenue and profits, triggered another sell-off due to further expansion in investment spending and debt. Do the previous results and the market’s reaction help us better prepare for the upcoming earnings call?

Consensus

Analysts’ consensus, in the context of the broader sector and the company’s situation, can be summed up as: “It’s bad, but it can always get worse.” This matters because the company’s financial position is currently questionable despite phenomenal revenue growth.
The median of available forecasts shows:

• Expected revenue of about USD 19.05 billion: a slight quarter-on-quarter decline, but still up 28% year over year.
• Non-GAAP EPS of about USD 1.75: again a quarter-on-quarter decline, but up about 18% year over year.

This means the analyst and market consensus appears to be largely aligned with management’s guidance. However, for AI and hyperscale companies, dry, surface-level financials often have little value. For Oracle, the key items will be: cloud revenue, receivables, guidance, debt, and CAPEX.

• Cloud revenue (for Oracle this is IaaS plus SaaS) needs to reach at least about 60% year-over-year growth to even partially calm investor concerns and justify the massive investments.
• The order backlog will likely come in within the USD 630 to 650 billion range. Similar figures are already priced in. Much more important will be information on delivery timelines, contract durability, and customers’ ability to pay.

What to look for? 

A make-or-break issue for the upcoming earnings call could be the status of contracted infrastructure and/or the debt situation.

1. In Abilene, Texas, Oracle is involved in building a data center with power consumption of about 1.2 gigawatts. This is one of the company’s most important investments, and any new positive or negative updates could affect shareholder sentiment.
2. Additionally, Oracle already operates a number of smaller or older data centers which, if the company’s forecasts and AI expectations are to be met, should show a meaningful increase in profitability and utilization rates. If that is indeed the case, management will likely mention it in the earnings presentation. If they do not, it may suggest infrastructure occupancy is not as strong as the market hopes.
3. The “elephant in the room” remains debt. Oracle is one of the few companies in the technology sector that has managed to take on debt to a degree that could threaten solvency if AI investments turn out to be a failure. This is not a hypothesis, but a clear signal from the CDS market. In this context, the market will be sensitive to further “above-plan” increases in investment spending, rising interest costs on debt, and the quality of currently secured financing.
4. The options market going into the pre-earnings session implies post-release volatility of about 10%, which means that both disappointment and a positive surprise will likely lead to a significant move in the stock’s valuation.