Oracle Stock Is Still Cheap - All Eyes Today on its Results and FCF Margins

Oracle Corp (ORCL) generates massive free cash flow (FCF). That makes ORCL stock attractive to value investors as it could be worth 10% or more than today. On Sept. 11, the stock was at $126.73, up 12% from its low on Aug. 10 when it closed at $112.99.

It also makes a popular short-selling strategy popular with traders. I discussed this in my last Barchart article (Aug. 14) on Oracle stock, “Oracle Stock Still Looks Cheap - Especially for Short Put Plays.”

FCF Estimates - Results Due Today

Here is a recap. I pointed out that Oracle reported $8.47 billion in FCF on $50 billion in revenue for its past 4 quarters ending May 30. That was a peak in FCF and worked out to a 16.9% FCF margin and its FCF level was up 68% year-over-year (YoY).

After the market closes today, Sept. 11, the company will report its fiscal Q1 ending Aug. 31.

All eyes will be on its FCF margins. As seen last quarter, analysts will be looking to see if its trailing FCF margins and growth keep pace with the prior quarter's stellar results.

As it stands now, analysts project $12.47 billion in revenue for the quarter ending Aug. 31. 

Therefore, on an annualized basis, that works out to $54.15 billion in estimates of revenue for the year ending May 2024. So, if we apply a 17% FCF margin to this revenue forecast, FCF could reach $9.2 billion.

That would be 8.68% higher than the $8.47 billion in trailing 12-month (TTM) FCF it reported last quarter.

Valuation

Based on this, we can estimate its true value. For example, as I pointed out in my last article, it would not be out of the question for the stock to have a 40x FCF metric. That works out to a 2.5% FCF yield.

Therefore, multiplying $9.2 in FCF by 40x equals a market cap estimate of $368 billion. Its market cap today is $344.7 billion. This implies a 7% gain in the stock if analysts' projections of its revenue stay level. 

However, if its FCF margin improves and/or revenue estimates rise, the stock could be worth significantly more. That is why I believe it is worth at least 10% more, or $139.37 per share.

Shorting Out-of-the-Money Puts

Last month we recommended shorting the $109.00 strike price puts expiring Sept. 1. The stock finished above that level so the income received from this short play was kept and the puts were not exercised.

It also makes sense to short another out-of-the-money (OTM) put play, given that its put premiums are high. For example, the $120 strike price puts for the period expiring Oct. 6 trade for $1.69 per put.

ORCL Puts - Expiring Oct. 6 - Barchart - As of Sept. 11, 2023

That strike price is over 5% below today's price, a very good OTM level. Moreover, the income received from shorting these puts works out to 1.408% for just 25 days until expiration. 

That means that if this trade can be repeated each month for a year the return would be 16.9%. Since ORCL pays a 1.27% dividend yield, this type of strategy enhances investors' income while they wait for the stock to rise to its true value.

This shows that not only is ORCL stock cheap, but shorting its OTM puts for near-term expiration periods is a good way to make extra income.

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.