Oracle Corp. Faces Capacity Constraints Amidst Post-Earnings Decline

Oracle Corp. (ORCL) is grappling with capacity constraints as its shares experience another sharp decline following its latest quarterly results. While the software and applications company fell slightly short on its top-line performance and witnessed a deceleration in its Oracle Cloud Infrastructure (OCI) business, optimistic analysts are highlighting potential opportunities.

Evercore ISI analyst Kirk Materne suggests adopting a “glass half full” approach. Despite the less-than-stellar fiscal third-quarter guidance and backlog growth, Materne emphasizes the importance of OCI’s backlog transforming into stable revenue growth. He believes that if OCI’s growth can stabilize in the 50% range over the next few quarters, the risk-reward ratio for Oracle skews favorably. While Oracle may be in a “show me” mode in the short term, Materne anticipates a potential reacceleration in revenue by 2024 due to the optionality around the public cloud market opportunity.

Materne maintains an outperform rating on Oracle shares, albeit with a revised price target of $130 (previously $135).

During Tuesday morning trading, Oracle’s stock tumbled by 9.5%.

According to Bernstein analyst Mark Moerdler, Oracle’s smaller data centers compared to its hyperscaler peers contribute to the company’s current demand-supply imbalance. As Oracle embarks on a potentially risky data-center expansion, its cloud growth also faces a slowdown.

Opinion: Oracle embarks on potentially risky data-center expansion as its cloud growth slows

In summary, while Oracle grapples with capacity constraints and its shares decline post-earnings, some analysts maintain an optimistic outlook. They believe that if Oracle can stabilize the growth of its OCI business and address its demand-supply imbalance, the company has significant potential for future revenue acceleration. However, Oracle’s decision to expand its data centers may pose risks as its cloud growth slows down.

Growing Pains and Optimistic Future for Oracle

Oracle Corporation is facing some supply chain issues, similar to the server supply problems in the past. However, industry experts remain confident that these challenges will be overcome, and the company’s management believes that customer demand is still strong. Despite experiencing some growing pains, analysts are optimistic about Oracle’s future performance.

Analyst Marc Materne emphasizes that demand for Oracle’s products and services remains intact. While customers may have to wait for months to access their full capacity due to supply chain constraints, Materne is convinced that customers will not turn to competitors. He sees this as a temporary obstacle rather than a fundamental issue that undermines his positive outlook on Oracle’s prospects.

Materne expects the situation to improve in the coming months. He anticipates that supply chain issues will persist, but he believes that the positive results will become evident in the second half of the year, particularly in the fourth quarter. Like last year, Materne believes that Oracle’s performance will pick up significantly in the latter part of the year, potentially making the fourth quarter an outstanding period for the company.

With an outperform rating on Oracle’s stock, Materne has increased his price target from $144 to $147 in his latest assessment. This reflects his confidence in Oracle’s ability to overcome its current challenges and deliver strong financial results.

Another analyst, Alex Zukin from Wolfe Research, maintains an optimistic view of Oracle as well. Despite lowering his price target from $140 to $130, Zukin reiterates his outperform rating. He highlights that management is determined to achieve its targets and expects accelerating organic cloud growth in the next quarter. Zukin also emphasizes that Oracle’s data-center expansion is not limited by a shortage of graphics-processing units (GPUs). He believes that even though Oracle’s stock has experienced some pullbacks, the company’s underlying demand trends remain strong, making it an attractive investment opportunity.

On the other hand, Sebastien Naji from William Blair questions whether Oracle’s future business trends will genuinely surprise the market. While acknowledging that the company is experiencing solid demand momentum in its Oracle Cloud Infrastructure (OCI) business, Naji believes that current stock prices already reflect expectations for revenue acceleration and generative AI tailwinds. He maintains his market-perform rating, expressing caution about potentially unrealistic market expectations.

In summary, oracle faces temporary challenges with its supply chain, but industry experts express confidence that the company will overcome them. With expectations of positive results in the second half of the year and potential for a strong fourth quarter, analysts maintain their positive outlook on Oracle’s stock. Despite differing opinions on stock performance, all commentators acknowledge the strong customer demand and growth potential for Oracle.

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