Oracle's Stock May Drop by 9% on Bearish Outlook

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

Oracle Corp.'s (ORCL) stock has risen by over 20% since the end of June, a welcome improvement for a stock that had gone nowhere the previous year. But the recent bullish period may be about to end. Technical analysis and options trades suggest the stock could fall by as much as 9% by the start of early next year. 

The company reported better than expected fiscal third quarter 2018 results on September 17 but offered weak revenue guidance. It has prompted analysts to slash their revenue estimates for the coming quarter and the balance of 2018. (See: Oracle Stock Seen Rising 11% Despite Red Flags.)

ORCL data by YCharts

Weak Technical Chart

The technical charts suggest the shares are due to fall from their current price of around $51.65. The stock has hit a technical resistance level of around $51.90 and has now filled a technical gap that occurred when the shares fell in March. Should the shares decline, they may move down to technical support of around $48.60, a decline of 6%. (See: Oracle's Stock Faces Steep Declines Ahead.)

Bearish Bets

Some options traders are betting the shares will fall even further. Options volume is rising for $48 puts - bets that the stock will fall - for expiration on January 18. The number of puts has doubled to more than 7,000 open contracts since the company reported quarterly results. For the buyer of those puts to earn a profit, the stock would need to fall to at least $47 a decline of 9% from Oracle’s current price. 

Cutting Estimates

Negative sentiment has been rising after the company lowered its growth forecasts. Analysts have cut their revenue estimates for the fiscal second-quarter by 3% and now see revenue in the fiscal 2019 falling by more than 1% from a year ago. 

ORCL Revenue Estimates for Current Fiscal Year data by YCharts

Analysts also have cut full-year revenue estimates for fiscal 2019 and 2020.

Oracle's earnings are expected to rise an estimated 8% in fiscal 2019 despite weak revenue growth. That makes the shares look expensive at a 2020 PE ratio of 14 which is two times its growth rate. Numbers like that explain the major headwinds facing Oracle's shares.

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.