Software company Oracle stunned Wall Street today as it plummeted to $101.69, marking a -6.1% change compared to the S&P 500 and the Nasdaq indices, which logged -1.0% and -1.0% respectively. ORCL is -18.39% below its average analyst target price of $124.61, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Oracle shares have outperformed the S&P 500 by 26.0%, with a price change of 40.0%.
Oracle's trailing 12 month P/E ratio is 30.2, based on its trailing EPS of $3.37. The company has a forward P/E ratio of 17.2 according to its forward EPS of $5.92 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Oracle's PEG ratio of 2.0 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of Oracle's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-06-21 | 42,440,000 | -17,733,000 | 37 | -5.13 |
| 2021-06-21 | 40,479,000 | -16,842,000 | 39 | 8.33 |
| 2020-06-22 | 39,068,000 | -16,928,000 | 36 | 2.86 |
| 2019-06-21 | 39,506,000 | -17,489,000 | 35 | 0.0 |
| 2018-06-22 | 39,383,000 | -17,419,000 | 35 | -2.78 |
| 2017-06-27 | 37,792,000 | -16,861,000 | 36 |
- Average operating margins: 36.3%
- Average operating margins growth rate: 0.6%
- Coefficient of variability (lower numbers indicate less volatility): 4.1%
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Oracle's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-06-21 | 9,539,000 | -4,511,000 | 14,050,000 | -22.04 |
| 2021-06-21 | 15,887,000 | -2,135,000 | 18,022,000 | 22.57 |
| 2020-06-22 | 13,139,000 | -1,564,000 | 14,703,000 | -9.3 |
| 2019-06-21 | 14,551,000 | -1,660,000 | 16,211,000 | -5.32 |
| 2018-06-22 | 15,386,000 | -1,736,000 | 17,122,000 | 6.04 |
| 2017-06-27 | 14,126,000 | -2,021,000 | 16,147,000 |
- Average free cash flow: $16.04 Billion
- Average free cash flow growth rate: 0.0%
- Coefficient of variability (the lower the better): 109984592248.2%
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ORCL have received an annualized dividend yield of 1.4% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Oracle's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 117, so it's likely that equity investors are over-valuing the company's assets.
Since it has an average P/E ratio, an elevated P/B ratio, irregular cash flows with a flat trend, Oracle is likely overvalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and strong margins with a stable trend. We hope you enjoyed this basic overview of ORCL's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
