Is Oracle Now a Cheap Value Stock or a Value Trap?

By Jon C. Ogg Published Jul 3, 8:05AM EDT

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Oracle Corp. (NYSE: ORCL) is one of the best software giants in the world. The problem is that investors got their wings clipped much more than they would have hoped for after the latest earnings report. Sometimes stocks sell off too much, and 24/7 Wall St. wanted to see if Oracle’s current stock price is now a value proposition or a value trap.

With shares trading around $40.30, the consensus analyst price target is just above $46.57 and the 52-week range is $35.82 to $46.71.

Canaccord Genuity issued a late-week call on Oracle, signaling that it believes the stock represents significant value. In fact, the firm’s Richard Davis sees fair value at $50.00, representing close to 25% upside when you consider the dividend yield.

The firm did trim estimates to better align with a likely currency impact. After all, currency was a roughly $0.09 per share drag last quarter. That took the first-quarter estimate down from $0.54 to $0.52, and the analyst trimmed 2016 and 2017 estimates by $0.05 and $0.03 per share, respectively.

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Canaccord Genuity’s $50.00 price target is based on a 15 times the enterprise value to free cash flow multiple applied to the firm’s fiscal 2017 free cash show per share estimate of $3.04 and then adding back approximately $4.50 in prospective net cash per share. Davis said:

Oracle shares have sold off more than 10% since the firm reported fourth quarter earnings two weeks ago. The disappointment was largely driven by currency-muted revenue growth and a material earnings shortfall as customers opted for cloud purchases (with deferred revenue recognition) instead of paid-up licenses in the quarter. The bottom line is that the firm’s transition to the cloud is happening faster than expected, which when viewed objectively is actually a good thing. We cannot stress enough that the economics of a cloud subscription, versus a license + maintenance deal, are more attractive by a factor of 2-3x over the long term. We view the near-term disruption in ORCL shares, which are now trading at 12x our F2017 FCF/share estimate, as a good buying opportunity.

As far as what this means compared to the consensus estimates, Oracle trades at just under 15 times expected forward earnings. That is not dirt cheap, but it is far cheaper than the broader market. Also, the $50.00 price target from Canaccord Genuity is just $2.00 shy of the highest analyst price target.

Now investors just have to wait and see if Oracle ends up making a big acquisition. That will perhaps make the biggest determination on whether Oracle’s growth gets back on track, assuming currency woes remain high.

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About the Author Jon C. Ogg →

Jon Ogg has been a financial news analyst since 1997. Mr. Ogg set up one of the first audio squawk box services for traders called TTN, which he sold in 2003. He has previously worked as a licensed broker to some of the top U.S. and E.U. financial institutions, managed capital, and has raised private capital at the seed and venture stage. He has lived in Copenhagen, Denmark, as well as New York and Chicago, and he now lives in Houston, Texas. Jon received a Bachelor of Business Administration in finance at University of Houston in 1992. a673b.bigscoots-temp.com.