Why Oracle could outbid Microsoft, Twitter in TikTok race

US enterprise software provider Oracle Corporation (NYSE: ORCL) is scheduled to report results for the first quarter of fiscal 2021 at 14:00 PT on Thursday 10 September 2020.

Below, we highlight three key stock fundamentals that investors should consider ahead of Oracle’s upcoming earnings report.

Oracle stock up 10% since TikTok bid made news

The Oracle stock has rallied as much as 10% since mid-August, when The Financial Times reported that Oracle was in talks with a group of investors to bid for social media app TikTok’s US operations.

Oracle co-founder Larry Ellison was said to have had preliminary negotiations with TikTok’s parent company ByteDance for the purchase of the app’s businesses in the US, Canada, Australia and New Zealand.

Sources with direct knowledge of the matter said Oracle’s entry into the bidding war provides ByteDance with a ‘credible alternative’ to Microsoft/ Walmart and Twitter’s offers – the only other bids on the table currently.

Red Pulse analysts wrote that ‘Oracle has several qualities that may allow it to succeed in the TikTok's acquisition, outbidding Microsoft and Twitter’.

For instance, Ellison is a known support of the current US administration. US President Donald Trump has also told reporters that he supports Oracle’s bid.

Additionally, TikTok may also take advantage of Oracleʼs Cloud Infrastructure unit, described as one of a handful capable of storing data generated by TikTokʼs 100 million US users.

As of November last year, Oracle was the eighth ranked US company in terms of cash flow at US$35.7 billion. An acquisition of TikTok, while viewed by some as strategically odd, is certainly financially feasible.

Oracle’s interest in TikTok also helped to shield its stock from last week’s tech sell-off storm.

Last Thursday 03 September 2020, while most tech stocks saw their share prices decline over 5% as a result of market correction, the Oracle stock was in turn able to rally to a one-year high of US$59.40.

Oracle rated ‘hold’ by Wall Street

Across the board, Oracle currently has a majority rating of ‘hold’ from 19 out of 30 Wall Street brokers polled by Bloomberg.

The stock has also received an average 12-month share price target of US$55.06 per share.

This represents a small downside of 1.7% from the last traded price, indicating that the stock is already trading at its peak market value.

In terms of specific price estimates, Credit Suisse equity researchers have rated the Oracle stock ‘outperform’, while lifting price target to US$62 (up from US$58).

On the other hand, Needham & Company brokers reiterated a ‘hold’ rating on the same day, while withholding price estimates.

For now, 86% of all opened IG client accounts on the Oracle counter currently hold a ‘long’ (buy) position, indicating an expectation for price to increase in the near future.

Oracle closed at US$56 a share on Friday 04 September 2020 on the IG platform.

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Oracle’s Q1 2021 sales expected to remain flat

Analysts polled by Bloomberg are expecting adjusted non-GAAP earning per share (EPS) to come in at US$0.861 against a revenue of US$9.18 billion for the B2B software company’s Q1 2021.

The projected revenue, if realised, would represent a 0.4% year-on-year decrease and a much bigger decrease of 12.1% from the last quarter (Q4 2020).

Bloomberg Intelligence analysts, who have a base revenue case of US$9.2 billion, wrote that Oracle ‘may be one of the few software companies not to see a significant near-term contribution from higher digital spending, given its high concentration of on-premise infrastructure products’.

They added that recent results from bellwether software providers such as VMware, Salesforce.com and Workday suggest that IT budgets are shifting much more quickly to cloud-based application software products from on-premise infrastructure.

As such, this trend doesn't bode well for new database licenses and hardware sales for Oracle for at least the next two to three quarters, including the upcoming Q1 report.

‘We now don't expect recovery in new database licenses until 2021, as IT budgets appear to be shifting more quickly to cloud products,’ they concluded.

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