Oracle’s (NYSE: ORCL) first-quarter results failed to impress the market last week. While the bottom line was in line with consensus estimates, revenue fell short. The results were released early and along with an announcement that Co-CEO Mark Hurd will be taking a medical leave of absence.

The stock price, which had already been under pressure since July, reacted negatively to the news, falling 5%. However, while the results were disappointing, the stock may be offering an opportunity at current levels.

 

Yet Another Quarter Without Revenue Growth

The software giant generated quarterly revenue of $9.22 billion, up 0.3% from a year earlier, and $70 million below estimates. Non-GAAP EPS at $0.81 were in line with analysts estimates. GAAP EPS of $0.63 were a cent ahead of estimates and 10.5% higher than a year ago.

The contribution from cloud services and license support revenue grew 4% to $6.8 billion and now accounts for 74% of total revenue. The three remaining segments saw their contribution to the top line declining marginally.

Besides the financials, the other news was that Oracle’s Co-CEO Mark Hurd would be taking a medical leave of absence. With Founder, Larry Ellison, and Co-CEO, Safra Catz, still in place, there should be no immediate concern over leadership. However, Hurd is viewed as a driving force behind Oracle’s cloud business, and a permanent exit would be a blow to the company.

 

A More Attractive Opportunity?

In June we said there was a risk that investors would lose patience if sales didn’t pick up soon and that Oracle was becoming an increasingly binary bet. That view still stands, though the bullish case is looking more attractive now.

While revenue remains flat and doesn’t tie up with management’s bullish stance over the last few quarters — Oracle’s healthy margins imply that may not matter.

The $52 level should act as a substantial support level now that the buyback has been extended. This implies limited downside with the possibility of a strong rally if sales improve.

One thing the company has managed to do is maintain solid margins, despite the top-line essentially being flat since 2011. In that time, gross margins have stayed between 7 and 8% while the operating margin has held above 35%. Cash flow is also strong and has been directed toward share buybacks and quarterly dividends.

The buyback authorization has now been extended by another $15 billion. Share buybacks should ensure that EPS growth justifies the earnings multiple, even if sales don’t grow. Moreover, if sales do tick up, multiple expansion could quickly add 50% to the stock price.

After the previous quarter’s earnings call, the stock went on to make a new high at $60.50 before erasing all those gains and testing support at $52 several times. Between August’s volatility and last week’s disappointing earnings, many of the weak holders may have exited the stock.

The $52 level should act as a substantial support level now that the buyback has been extended. This implies limited downside with the possibility of a strong rally if sales improve.