Oracle (ORCL) is one of the most watched stocks by Zacks.com visitors recently. So, it might be a good idea to review some of the factors that could affect a stock’s short-term performance.
Over the past month, shares of the software maker have returned +11.3%, compared to a change in the Zacks S&P 500 Composite of +3.3%. During that period, the Zacks Computer – Software industry, which includes Oracle, gained 3.9%. The key question now is: What could be the future direction of stocks?
While media releases or rumors of a significant change in a company’s business outlook usually make its stock ‘trend’ and lead to an immediate price change, there are always some underlying facts that ultimately dominate buy-and-hold decisions.
Revisions to earnings estimates
Here at Zacks, evaluating the change in a company’s future earnings projection is a priority over anything else. This is because we believe that the present value of its future earnings stream is what determines the fair value of its shares.
Our analysis is basically based on how sell-side analysts covering the stock revise their earnings estimates to take into account the latest business trends. When a company’s earnings estimates rise, the fair value of its stock also rises. And when the fair value of a stock is higher than the current market price, investors tend to buy the stock, resulting in an increase in its price. This is why empirical studies show a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Oracle is expected to post earnings of $1.64 per share, which would indicate a change of -1.8% compared to last year’s quarter. The Zacks Consensus Estimate has changed -1.5% in the last 30 days.
The consensus earnings estimate of $5.58 for the current fiscal year indicates a +9% year-over-year change. This estimate has changed by -0.1% in the last 30 days.
For the next fiscal year, the consensus earnings estimate of $6.14 indicates a change of +10.1% from what Oracle expects in a year ago report. Over the past month, the estimate has changed by +0.1%.
Given the strong outside revision, our proprietary stock rating tool, Zacks Rank, offers a more compelling picture of the stock’s near-term price direction, as it effectively leverages the strength of the earnings estimate revision. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Oracle is ranked a Zacks Rank #3 (Hold).
The chart below shows the evolution of the company’s 12-month EPS consensus estimate:
12 months of earnings per share
Estimated revenue growth
While a company’s earnings growth is arguably the best indicator of its financial health, nothing is happening if it can’t grow its revenues. It is almost impossible for a company to increase its earnings without a long-term increase in revenue. Therefore, knowing the company’s potential revenue growth is crucial.
In Oracle’s case, the consensus sales estimate of $14.55 billion for the current quarter indicates a year-over-year change of +5.2%. Estimates of $53.26 billion for the current and next fiscal year of $57.41 billion show changes of +6.6% and +7.8%, respectively.
Last reported results and surprise history
Oracle reported revenue of $13.28 billion last quarter, representing a +7.1% year-over-year change. EPS of $1.41 for the same period compared to $1.22 a year ago.
Compared to the Zacks Consensus Estimate of $13.27 billion, reported revenue represented a +0.04% surprise. The surprise per share was +2.92%.
The company has beaten consensus EPS estimates in each of the last four quarters. The company beat consensus revenue estimates twice during that period.
Value
No investment decision can be effective without considering the value of the stock. Whether the current share price correctly reflects the intrinsic value of the company’s core business and growth prospects is a key determinant of future price performance.
While comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical value, it helps determine whether a stock is fairly estimated, overestimated or underestimated; comparing the company against its competitors according to these parameters gives a good sense of the reasonableness of the share price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to rank stocks from A to F (An is better than B; B is better than C; and so on), is quite a help identify whether a stock is overvalued, correctly valued or temporarily undervalued.
Oracle is rated D on this front, indicating that it trades at a premium to its peers. Click here to see the values of some of the valuation metrics that led to this rating.
The point
The facts discussed here and many other information on Zacks.com could help determine whether or not the market buzz about Oracle is worth paying attention to. However, its Zacks Rank #3 does suggest that it may be in line with the broader market in the near term.
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