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

Oracle Corp. (ORCL) shares fell by nearly 10 percent to approximately $47.20 on the day following the release of its fiscal third-quarter 2018 results. But the decline may be far from over, with the stock potentially set to fall roughly 7 percent based on an analysis of Oracle's chart, options, and valuation. 

Oracle's third-quarter earnings topped analyst estimates by nearly 15 percent, with earnings per share of $0.83 versus estimates of $0.72. But those earnings were not enough, because they came on a lower-than-expected tax rate, while the revenue outlook for the fourth-quarter fell short of expectations. 

Technicals Breaking Down

Oracle shares have traded sideways since June of 2017, and appear to now be breaking down following the 3Q results, and the chart suggests more downside risk could come. 

The stock has failed at resistance on three occasions, which serves as the first bearish indicator. Additionally, the stock has traded through a critical support level around $47.50, while also breaking a significant uptrend. This suggest that ORCL shares could fall nearly 7 percent toward $43.90. The relative strength index (RSI) has fallen to 32 but still has not reached oversold conditions with a reading below 30.

 

 

Options Bets

The options set to expire on April 20, imply that Oracle shares could rise or fall by about 5 percent by expiration using the $47 strike price. That puts the stock in a trading range of roughly $44.70 to $49.25. However, the put options contracts have traded over 5,000 contracts on the day, while the calls have only traded 2,200 contracts. 

Interestingly, the $45 strike price puts have traded nearly 32,000 contracts on the day. And with a cost of $0.41 per contract, it means a buyer of those puts would need the stock to fall below $44.60 to break even, a drop of nearly 5.5 percent. 

(Interactive Brokers)

Not Cheap

Fundamental Chart Chart

Fundamental Chart data by YCharts

Oracle's current valuation and earnings growth profile makes the stock relatively expensive despite a one-year forward P/E ratio of about 14.7 times, $3.30 per share. The company is projected to grow its earnings by only 6.7 percent in 2019, while revenue is only expected to increase by 3.2 percent to $41.1 billion. But when adjusting the P/E ratio for the earnings forecast, it gives the stock a pricey PEG ratio of about 2.2. 

For now, Oracle's stock has some big hurdles in front of it, with the potential for future declines. (See also: Oracle's Plan To Beat Amazon, Microsoft On Cloud.)

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 holdingsInformation 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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