Citi Adjusts Oracle's Price Target Amid Mixed Q4 Outlook

Key Metrics for Oracle

Stock Rating: Neutral
Revised Price Target: $128.00
Previous Price Target: $133.00
Stock Price (June 7, 2024): $125.92

Summary Points

• Citi revised Oracle's price target to $128, reflecting cautious optimism amid mixed fundamentals and incremental SaaS headwinds.
• Oracle's Q3 strong bookings contrast with a mixed Q4 outlook, highlighting the need for consistent cloud service uptake to meet long-term targets.
• Despite strong bookings, Oracle faces margin pressures from lower-margin cloud services, with FY25 sales guidance slightly below Street estimates.

Oracle's Mixed Q4 Setup: Awaiting Consistency in Cloud Services

Oracle Corporation (ORCL.K) is navigating a complex landscape as it heads into Q4, with Citi maintaining a Neutral rating and adjusting the target price to $128 from $133. The revised target price reflects a cautious outlook, driven by mixed fundamentals and incremental headwinds in the SaaS segment. Despite strong bookings in Q3, the outlook for Q4 is tempered by weaker channel performance and macroeconomic pressures affecting SaaS peers. Citi's analysis underscores the need for Oracle to demonstrate more consistent uptake of its profitable cloud services, particularly in the database segment, to meet long-term targets.

Revised Price Target Reflects Cautious Optimism

Citi's updated target price of $128 is based on a 7x NTM EV/Sales multiple and a 36x NTM EV/FCF multiple, reflecting a balanced view of Oracle's near-term prospects. The peer group for this valuation trades at a median EV/Sales multiple of approximately 6.5x, with a range of 4x to 10x. The higher multiple for Oracle is justified by its strong bookings in Q3 and the potential for reaccelerating growth in its cloud services. However, the revised EPS guidance for FY25, now at $6.19, is slightly below the Street estimate of $6.23, indicating some caution in the near term.

Cloud Services and SaaS: A Tale of Two Segments

Oracle's Q3 performance was bolstered by strong bookings, but the outlook for Q4 is mixed. The company's Infrastructure as a Service (IaaS) segment is expected to benefit from seasonality and overage, potentially offsetting weaknesses in the Software as a Service (SaaS) segment. Citi's survey of 25 resellers revealed that quota achievements were slightly worse than the previous quarter, with 48% missing their targets compared to 42% last quarter. Despite this, price increases provided a 4% boost in sales, up from 3% in the previous quarter.

Citi's analysis noted, "We expect 4Q results to come in slightly above the mid-point with potential OCI upside (bookings ramping + overage) offset by incremental weakness for SaaS which could further decelerate into low-teens growth given macro commentary across HCM/SaaS peers in recent weeks."

Margin Pressures and Profitability Outlook

Despite the strong bookings, Oracle's margins remain under pressure due to a mix shift towards lower-margin cloud services. The company reported an EPS of $1.41 for Q3, in line with consensus estimates. However, the outlook for Q4 indicates continued margin pressures, with expected revenues in the range of $12.5 billion to $12.7 billion and an EPS guidance of $1.65, slightly below the Street estimate of $1.66. For FY25, Oracle has provided a sales guidance range of $67 billion to $69 billion, with a midpoint of $68 billion, slightly below the Street estimate of $68.5 billion. The adjusted EPS guidance for FY25 is $6.19, reflecting a cautious but optimistic outlook.

Outlook

Citi remains cautiously optimistic about Oracle’s long-term potential, underpinned by strong bookings and the potential for reaccelerating growth in cloud services. However, the transition to cloud-based revenue streams, which have lower margins, poses a significant challenge. Citi highlights two primary risks to the price target: the transition risk in Oracle's core business and the potential for increased competition from SaaS players. These factors could hinder Oracle’s ability to achieve the projected growth and margin targets within the expected timeframe.

Defending their price target, Citi noted that, "We see fundamentals as mixed: read-throughs from SaaS peers offer incremental caution on HCM/ERP etc, while our reseller survey suggested slightly weaker channel performance."