Oracle's Slumping Stock May Rebound Sharply

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Oracle Corp.’s (ORCL) stock performance has been lackluster thus far in 2018, with shares up about 2% versus an S&P 500 that is up by about 5%. However, that doesn’t tell the whole story, because shares of the software company are nearly 8% off their mid-March highs. The stock plunged in mid-June, after posting uninspiring results that left analysts and investors with more questions than answers surrounding the company’s transition to a cloud-based business. (For more, see also: Oracle Reports Earnings Below Key Technical Levels.)

Now options traders are betting shares rebound by as much as 9%, from the stock’s current price of around $48.65. Meanwhile, an analysis of the technical chart also suggests an increase in the price by about 7%. Still, analysts have been slashing their price target for the stock in recent weeks and their earnings outlook for the upcoming fiscal first quarter.

ORCL data by YCharts

A 9% Rise

The options set to expire on September 21 suggest shares of the software company rise or fall by about 7% from the $49 strike price, using the long straddle options strategy. It places the stock in a trading range of $45.50 to $52.50, that’s because it cost about $3.45 for a trader to buy one put and one call. Interestingly, the number of bets that shares will rise massively outweighs the wagers the stock will fall by a ratio of about 8 to 1, with nearly 9,600 open call contracts. Some traders are betting shares rise to about $53, based on the $52.50 strike price, an increase of almost 9% should the options be held until expiration. (For more, see also: Oracle’s Plan to Beat Amazon, Microsoft on Cloud.)

Bullish Technical Gap

The technical chart suggests shares of Oracle may be set to rebound to about $52, a rise of about 7%. The stock is in the process of filling a technical gap that was created in mid-March after the stock fell from about $52 to $47. The stock has now cleared technical resistance around $48.60 and may be on its way to refilling the gap, rising to $52. 

Bearish Analysts

Analysts, on the other hand, have been cutting their price target on the stock recently, with the average target falling by about 4% to roughly $53.70, still about 10.5% higher than the stock’s current price. However, analysts have also reduced earnings estimates for the upcoming fiscal first quarter, to $0.68 per share, a drop of about 4%. Meanwhile, revenue estimates have been trimmed, by 2.5% to roughly $9.3 billion. 

ORCL Price Target data by YCharts

Whatever the case may be, Oracle is going to need to post better results in the future to keep this current rebound from fizzling out. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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