Should value investors ignore analysts’ warnings?

Enterprise software specialist Oracle (NYSE:ORCL) is not among the ‘Magnificent Seven’ tech giants of 2023. But by December 12, Oracle stock looked poised to close out the year with a surprising rally.

ORCL shares plunged 12% on Tuesday even as major stock market indices remain firmly in the green. Clearly, the Consumer Price Index (CPI) numbers of the day were not the negative catalyst that soured Oracle investors.

With the stock falling precipitously, value seekers may have wondered if this could now be the best deal to pick. But before backing up the truck and buying the stock, investors should consider the commentary of a prominent analyst who clearly sees major red flags for Oracle.

Another quarterly performance from Oracle

In summary, Oracle’s primary business niche is cloud computing software and services. The company’s most notable product is Oracle Cloud Infrastructure, which competes with Amazon’s (NASDAQ:AMZN) Amazon Web Services (AWS), Microsoft’s (NASDAQ:MSFT) Azure, and Alphabet’s (NASDAQ:GOOGL)(NASDAQ:GOOG) Google Cloud.

Oracle is also in the process of acquiring electronic health records company Cerner. But you still have cloud connectivity.

According to Oracle Chairman Larry Ellison, the acquisition of Cerner means that Oracle is “giving overworked healthcare professionals a next-generation, easy-to-use digital tool to secure cloud applications by accessing information through a hands-free voice interface.”

This means that most Oracle business operations involve cloud computing in some way. This means the company will have to compete with the “Magnificent Seven” giants such as Amazon, Microsoft and Alphabet. It’s definitely not an easy task.

Amid these difficult circumstances, Oracle actually posted better earnings in the second quarter of fiscal 2024. On an adjusted non-GAAP basis, Oracle earned $1.34 per share, compared to Wall Street’s $1.33 per share requirement. This isn’t a huge achievement, but it solidifies the company’s healthy track record of improving quarterly performance.

This has been the year that artificial intelligence (AI) has captured the attention of investors, so it’s not surprising that Oracle CEO Safra Catz mentioned generative AI in the company’s quarterly press release.

“Demand for cloud infrastructure and generative AI services is growing at an astronomical rate… To measure this demand, Oracle’s total Remaining Performance Obligation (RPO) has grown to over $65 billion, exceeding annual revenues .” Catz boasted. “Business is doing well and getting better.”

But that’s a matter of opinion, and clearly the investment community disagrees with Catz’s optimistic assessment. Again, ORCL stock down 12% in one day speaks volumes.

During the second quarter of fiscal 2024, Oracle generated net revenue of $12.9 billion, short of analysts’ consensus estimates of $13.1 billion. Additionally, Oracle’s total quarterly cloud revenue totaled $4.8 billion, up 25% year-over-year. This may sound impressive, but it’s a slowdown compared to the 29% year-over-year revenue growth in the previous quarter.

Analysts are concerned, so let the chips fall where they may.

Slowing revenue growth isn’t the only problem. There may also be some friction in Oracle’s acquisition of Cerner’s assets.

“We believe the company’s high-single-digit percentage (HSD) growth may be unsustainable due to Cerner integration headwinds and increased competition in the data center market,” explained DA Davidson analyst Gil Luria.

On a recent quarterly conference call, Ellison attempted to calm investor concerns about the Cerner integration. Cerner’s products are “moving very quickly from license-based to subscription-based,” Ellison assured investors.

Meanwhile, William Blair analyst Sebastien Naji expressed concern that ORCL stock may have gotten ahead of itself (prior to the 12% cliff dive, of course). Naji therefore believes that “stocks are already loaded with expectations of accelerated earnings and generative AI tailwinds.”

But the most pressing of all concerns appears to be Oracle’s slowing cloud revenue growth.

Summarizing market malaise, UBS (NYSE:UBS) analyst Karl Keirstead warned: “Oracle has failed to meet cloud/OCI growth expectations for the second consecutive quarter, once again blaming the pace of infrastructure capacity expansion. “It’s frustrating and it’s hard to get visibility.”

That said, there’s uncertainty about how Oracle can get its cloud revenue growth back on track. This is problematic because markets love clarity and hate uncertainty.

As a result, ORCL stock at or near $100 doesn’t necessarily have great value. A stock is only worth what the market feels it’s worth, and the market may choose to punish Oracle for a time due to its lack of “visibility” (to use Keirstead’s words).

So, while it’s okay to have Oracle on your watchlist for further updates, it’s probably not a good idea to take a large stake in the company now.