Is Oracle a Buy Here?

With shares of Oracle (NASDAQ:ORCL) trading around $30, is ORCL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Oracle is a provider of enterprise software and computer hardware products and services. The company’s software, hardware systems, and services businesses develop, manufacture, markets, host, and support database and middleware software, applications software, and hardware systems, with the latter consisting primarily of computer server and storage products. It is organized into three businesses: software, hardware systems, and services. Information technology products and services are seeing increasing demand due to the surge of companies in developing economies. As businesses continue to grow, look for Oracle to offer the support required that will send it to rising profits.

T = Technicals on the Stock Chart are Weak

Oracle stock has seen a consistent uptrend over the last several years. The stock is now seeing a sharp pullback after a couple of negative earnings reports. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Oracle is trading below its rising averages which signal neutral to bearish price action in the near-term.

ORCL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Oracle options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Oracle Options

25.16%

23%

20%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Oracle’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Oracle look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

16.49%

6.12%

23.26%

13.89%

Revenue Growth (Y-O-Y)

0.28%

0.90%

3.43%

-2.30%

Earnings Reaction

-2.58%

-9.67%

3.68%

0.65%

Oracle has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have grown to expect more from Oracle’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Oracle stock done relative to its peers, Microsoft (NASDAQ:MSFT), SAP (NYSE:SAP), International Business Machines (NYSE:IBM), and sector?

Oracle

Microsoft

SAP

International Business Machines

Sector

Year-to-Date Return

-10.11%

25.98%

-9.50%

1.80%

2.16%

Oracle has been a poor relative performer, year-to-date.

Conclusion

Oracle is an international supplier of software and hardware products and services to companies operating in various industries. The stock has displayed a consistent uptrend in recent years but is now seeing a pullback after a couple of negative earnings reports. Over the last four quarters, earnings and revenue figures have been rising, however, investors in the company have grown to expect more. Relative to its peers and sector, Oracle has been a poor relative performer, year-to-date. WAIT AND SEE what Oracle does in coming quarters.

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