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Oracle Corp (ORCL) delivered strong revenue, free cash flow, and guidance to analysts on Sept. 9. This was in its fiscal Q1 results for the quarter ending Aug. 31. As a result, ORCL stock still looks cheap here.
ORCL stock closed at $161.38 on Thursday, Sept. 12, up over 2.6% for the day. It's also up another 6.3% after hours at $171.70 today.
The bottom line is that this cloud company is now moving heavily into the AI infrastructure arena, pushing up its revenue guidance. In addition, as Bloomberg magazine points out, it's making great progress in helping large corporations with “on-premise” database storage and software to the cloud using Oracle facilities and software.
I discussed Oracle's prospects in my Barchart article last week “Oracle Corp Is Expected to Show Strong Free Cash Flow Results Next Week” (Sept. 6).
I projected that ORCL stock is worth $161.39 per share. So, now it's already hit that target. This article will look at what it's worth now.
Strong FCF Results and Revenue Guidance
Oracle posted 8% higher revenue YoY and during today's call (Sept. 12) with analysts management projected revenue will rise to $66 billion next fiscal year ending May 2026, up from $65 billion earlier.
Moreover, analysts project $58.04 billion for sales this year ending May 2025. So, the next year $66 billion forecast for next year represents top-line growth of 13.7%.
In addition, over the last 12 months (LTM), Oracle has generated $11.3 billion in free cash flow. That is excess cash flow over all the company's cash expenses, including capex spending and net working capital flows.
This is down slightly from last quarter's $11.8 billion FCF performance (see my previous Barchart article) and the table below.
However, it still represents a very high FCF margin as well as a growth of 19% YoY. For example, in the past year, its sales were $53.8 billion, so its FCF margin was 21% (i.e., $11.3b/$53.8b). That is a very high margin even though lower than last quarter's LTM 22.3% FCF margin.Nevertheless, as the company is now projecting $66 billion in sales next year, this implies FCF could rise to almost $14 billion (i.e., 0.21 x $66b = $13.86b). That is even higher than the $13.6 billion I projected in my article last week.
As a result, there is a higher target price for ORCL stock going forward.
ORCL Stock Target Price
For example, we can use a FCF yield metric to value ORCL stock. Its TTM FCF of $11.27 billion now represents a yield of 2.52% (i.e., $11.227b/$447.2 market cap today). That implies that if the company were to pay out 100% of its FCF as a dividend, the market would give the stock a 2.5% dividend yield.
So, this can be applied to next year's FCF forecast. For example, dividing the $13.86 billion in estimated FY 2026 FCF by 2.50% results in a market cap of $554.4 billion. That is over $107 billion higher than today and represents upside of 24%.
In other words, ORCL's price target is now 24% higher at $200 per share (i.e., $161.38 x 1.24 = $200.11 p/sh). This means there is still significant upside in ORCL stock for long investors.
Shorting OTM Puts Here
Last week, I suggested selling short the Sept. 27 put option at the $130 strike price (7.5% out-of-the-money then), for $2.55 in premium. That represented a 2.0% yield (i.e., $2.55/$130 = 0.0196) for a 3-week investment.
Today, that strike price is much lower at just 3 cents and 8 cents on the ask side. In other words, the investor has already made all the profit from this trade in 1 week.
Therefore, it makes sense to cover that contract (i.e., close it out by entering an order to “Buy to Close”) at say 6 cents.
That way the investor's capital is free to roll this trade over again. For example, the Oct. 11 expiration put chain (1 month away) shows that the $155.00 put strike price (i.e., 4% below the closing price) was at $1.76 on the bid side. That provides an immediate yield of 1.135% (i.e., $1.76/$155.00 = 0.01135) over the next month.
Moreover, given that ORCL is set to rise on Friday, it's likely to be lower when markets open. It might be better to sell short the “at-the-market” $160 strike price.
Today it's at $3.45 but is likely to be trading in the mid-$2.00 range on Friday. That would give investors a 1.56% put yield (i.e., $2.50/$160.00 on Friday).
The bottom line here is that investors can make money by both going long ORCL stock, as I wrote in last week's article and also shorting out-of-the-money (OTM) put options. That way the investor gets all the upside in the stock as well as additional income.
Moreover, the downside risk is that ORCL stock falls, forcing an assignment at good buy-in prices of $160 or $155.00. The actual breakeven level will be lower given the additional income generated by shorting these OTM puts.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
