Last Thursday Oracle (NYSE: ORCL) released results for the 3rd quarter of its fiscal 2019-year 2019. In extended hour trading the stock price initially reacted positively, before trading lower. On Friday the price initially fell nearly 5%, before recovering some of those losses. On the face of it, the weaker outlook for the 4th quarter spooked investors, though longer-term risks may also be weighing on the stock.

The company managed to beat estimates for both earnings and revenues, though revenue fell 3% from a year ago. Adjusted EPS came in at $0.87, versus the $0.84 analysts expected, and well up from a $0.92 loss a year ago. Total revenue for the quarter was $9.61 billion, $30 million ahead of analyst forecasts.

Oracle also announced that it had bought back $10 billion of its own stock, the third consecutive quarter it had done so.

The company lowered its revenue guidance for the fourth quarter to between $11.03 and $11.26 billion, down between 0 and 2% for the year and below the $11.14 analysts hoped for. EPS are expected to be roughly in line at between $1.05 and $1.09 for the quarter.

 

A Growing Force in the Cloud Business?

Cloud-service and license-support revenue now make up nearly 70% of total revenue.

Oracle was a late entrant to the cloud computing game, having previously expressed skepticism about the potential of the industry. In Thursday’s earnings call, Chairman and CTO, Larry Ellison emphasized the growing contribution cloud businesses now make to Oracle’s revenue.

Ellison said that customers preferred Oracle’s more integrated approach to cloud computing applications and that the Fusion Suite and NetSuite products were growing rapidly.

Cloud-service and license-support revenue now make up nearly 70% of total revenue. However, since these two segments have now been combined, it’s difficult to see how fast the cloud business is really growing. Some analysts believe this was done to obscure the real picture.

Some even sighted this as the reason Warren Buffet and Berkshire Hathaway dumped their entire Oracle position in February – after buying the stock just months earlier.

 

Oracle Comes with a Risk Warning

Some analysts have recently downgraded the stock because they believe the share buyback, which has supported the stock price, is not sustainable. Until January the stock was pretty much flat over 12 months, and the year-to-date rally appears to have been discounting a better outlook.

If it’s true that customers do prefer Oracle’s cloud solutions to those of competitors like AWS, the outlook would be very positive. However, revenue growth doesn’t really suggest that’s the case, and the company’s opaque reporting doesn’t instil confidence.

Add to that the disappointing outlook, and the risk of buybacks being reduced, the PE of 19 doesn’t look very attractive. There seem to be better technology and software plays around.

Maybe Oracle is actually a screaming buy – however, without more evidence for the success of its cloud business, it’s really not possible to weigh up the risks.