On Friday, Monness, Crespi, Hardt issued a downgrade for shares of Oracle Corporation (NYSE: NYSE:ORCL), shifting its rating from Neutral to Sell and setting a price target of $130.00. The action comes after the firm observed Oracle's stock significantly outperforming its peers this year, with a remarkable 62% year-to-date return, marking its best performance since 1999.
The company's current price-to-earnings (P/E) multiple of 40.4x is now roughly double its historical average before the rise of OpenAI's ChatGPT. According to InvestingPro analysis, Oracle is currently trading above its Fair Value.
The downgrade was influenced by Oracle's second-quarter fiscal year 2025 call last week, which yielded results that lacked inspiration according to the firm.
InvestingPro data reveals that 26 analysts have revised their earnings downwards for the upcoming period, while the firm noted that their earnings per share (EPS) estimate for Oracle for FY25 remains unchanged from a year ago, and their projection for Cloud Services revenue has been reduced. Moreover, Oracle's intention to double its capital expenditures in FY25 has raised concerns about sustainability.
Oracle is contending in a challenging public cloud market, which is dominated by three large, innovative, and financially robust Big Tech companies. These competitors are equipped with a growing array of generative AI tools and extensive cloud portfolios.
Despite Oracle being a high-quality company with potential to engage in cloud transformation and leverage generative AI trends, the firm believes that the current valuation is overstretched, competition is intense, the software industry is in a state of transition, and the macroeconomic environment is considered fragile.
The firm maintains that while Oracle has the opportunity to participate in important technological shifts, the decision to downgrade reflects a cautious stance on the company's financial prospects in the face of formidable industry challenges.
In other recent news, Oracle Corporation has reported a surge in Infrastructure as a Service (IaaS) revenues by 52%, marking a consistent growth trajectory from previous quarters. This growth is expected to continue through 2025, according to CFRA, a financial research firm.
The software giant's recent earnings report showed an EPS of $1.47, slightly below the consensus estimate, and a 9% increase in sales, driven by a 24% rise in cloud revenue. However, CFRA expressed caution due to Oracle's high net debt position of $77 billion.
In light of these developments, several analyst firms have updated their assessments of Oracle. TD Cowen reaffirmed a Buy rating on the company, citing a solid Q2 with 9% revenue growth and a significant 52% growth in Oracle Cloud Infrastructure (OCI).
Stifel raised its price target for Oracle, anticipating over 50% growth in its Cloud segment for the fiscal year 2025, while BMO Capital Markets increased its price target for Oracle, highlighting a 50% year-over-year growth in Cloud Current Remaining Performance Obligations (CRPO) and a 21% increase in Cloud Revenue Performance Obligations (RPO).
On the other hand, RBC Capital maintained its Sector Perform rating for Oracle, despite mixed financial results, showing skepticism towards the company's ambitious plans for cloud growth. Piper Sandler raised its price target for Oracle, expressing confidence in the potential shift from a multi-quarter to a multi-year growth acceleration. These are among the recent developments that investors should consider.
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