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Oracle Corporation: A Falling Knife

Oracle is clearly a falling knife. Some analysts believe this is irrational due to its strong revenue growth and recent acquisition that will boost its TAM.

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This story originally appeared on MarketBeat

Some of the biggest names on the NASDAQ have been sold off in a sector rotation that's still being felt today. These companies included bluechip FAANG stocks such as Google, Meta, and others. Investors piled into the technology sector once they saw tech companies soar during the pandemic with people being stuck at home driving up the revenue on subscription-based services. Now the market is viewing its investments with the wisdom of foresight. Many investors have changed their investment preferences towards stocks in staples and other shares that represent low volatility and a hedge against soaring inflation.

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Oracle (NYSE: ORCL) has been sold off along with the rest of its peers in the technology sector, but its losses are relatively benign compared to others. Oracle is currently down 21.92% YTD and the company's shares trade 27% below the MarketBeat consensus price target. Despite the company's deep discounting, it provides a number of competitive advantages to investors and is backed by strong sales growth and profitability. For many analysts, once the macro environment for Oracle improves, it's expected to bounce back to previously held levels and then some.

Oracle's Acquisition of Cerner

The biggest news of date with Oracle is its acquisition of Cerner, which is also the company's largest acquisition at $28 billion dollars. Cerner effectively opens the door for oracle to considerably boost its total addressable market in the healthcare technology industry. The company produces medical software and hardware while also boasting a strong real estate portfolio of retail pharmacies and laboratories. Cerner is also profitable and its revenues grow YoY. Cerner is expected to grow Oracle's annual revenue by 14% and its GAAP net income by 5%. The deal is expected to close in the fourth quarter of this year.

The company's acquisition also gives the company additional room for growth and FCF, and ultimately a higher share price. The stock rallied after the announcement was made that Oracle would acquire Cerner, and many analysts subsequently upgraded their ratings.

Oracle's Strong Q3 Results & Guidance

Oracle continued its strong growth in revenue and profitability. The company's revenues grew 4% YoY to $10.51B, which exceeded the top end of the guidance for the company. Executives noted that this strong revenue performance was the highest that it has ever seen since the company transitioned to offering cloud services. This is unsurprising considering that cloud revenue for the company grew 26% YoY.

One downside for the company during Q3 was the fact that its earnings took an appreciable hit. GAAP net income fell 54% to $2.32 billion, while its operating margins remained unchanged at 44%. The company's operating margins are slated to increase from 45% to 46% this year. The company also expects its EPS to increase as well, as this will be between $1.35 to $1.39, and its revenue to grow between 3% to 5%.

Oracle's Technical Outlook

Oracle's selloff just at the start of the new year is expected to continue to slide downwards towards the bottom along with the rest of the market. Some have viewed the stock's deep decline as a result of irrational mispricing by the market. The company expects its revenues and earnings to be unchanged. This compares favorably to that of its competitors that have negatively revised its earnings or withdrawn them entirely due to the unfavorable macroeconomic backdrop.

The stock is currently keeping its head above the oversold areas on the daily charts, but more downwards pressure could see it easily dip into this territory once again. Volumes have also decreased as traders and investors look to be hesitant to make bold moves as the stock is clearly a falling knife. Adding to the caution surrounding this stock, short interest is at its lowest levels for 12 months, with even the perma bears staying on the sidelines for now despite its technicals giving a convincing argument for a short.

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