Oracle’s Growth Is Only Skin Deep

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Oracle Results

Oracle (ORCL) stock jumped by over 13 percent last week after reporting quarterly results. The company easily beat both revenue and EPS estimates. The company also noted on its conference call it expected to see it is looking for solid y/y first quarter non-GAAP EPS growth.

Oracle Price Chart

ORCL Price data by YCharts

EPS Growth Mystery?

Oracle shares trade at 2018 forward PE of 16 and 2018 forward PEG ratio of 0.80. The shares appear relatively cheap.  However, Oracle only managed to grow GAAP top-line revenue by 3 percent, yet was able to grow GAAP net income by 15 percent.

GAAP Operating income also grew by only 3 percent. All of Oracle EPS “Growth” came from saving in income tax provision which declined by 42 percent to $529 million.

On an adjusted Non-GAAP basis we also find that revenue only by 3 percent, while operating income grew by only 5 percent, but yet net income grew by 10 percent. Again it was the tax saving of 15 percent that saved the quarter and provided the growth.

The Expectations

Revenue is only expected to grow to $41.69 billion, or 10 percent from 2017 total revenue over the next 3 years.
Oracle Annual Revenue Estimates Chart

ORCL Annual Revenue Estimates data by YCharts

EPS estimates expected nearly 23 percent to $3.36
ORCL Annual EPS Estimates Chart

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ORCL Annual EPS Estimates data by YCharts

Not Cheap

Suddenly, when you look at this way, one is paying 16 times for a company growing revenue only 10 percent over the next three years and is figuring out creative ways to increase EPS.

In this case, just beware what kind of growth one is buying.

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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.