Oracle (NYSE:ORCL) shares fell in premarket trading on Friday after it posted third-quarter earnings that missed estimates, prompting a downgrade from Piper Sandler.
Analyst Brent Bracelin downgraded Oracle (ORCL) to underweight from neutral and lowered the price target to $70 from $100, noting concerns about operating risks and free cash flow margins.
“Few companies have executed a cloud model transition without a hiccup, and the drag on [free cash flow] margins is well documented and could also temper multiple expansion going forward,” Bracelin wrote in a note to clients.
In addition, the analyst said that the firm prefers stocks like Salesforce (NYSE:CRM), Microsoft (NASDAQ:MSFT) and Workday (NASDAQ:WDAY) “that have less near-term operating risk and higher [free cash flow] growth prospects.”
Oracle (ORCL) shares slumped slightly more than 2% to $75 in premarket trading on Friday.
On Thursday, the Larry Ellison-founded Oracle (ORCL) said it earned $1.13 a share on $10.51 billion in revenue.
Oracle added earnings per share were lowered by 5 cents due to a decline in the share price of gene sequencing company Oxford Nanopore and an operating loss at Ampere.
In addition, Bracelin noted that although Oracle’s (ORCL) cloud growth rose again, with total cloud-related revenue rising 24% year-over-year compared to a 22% rise in the previous quarter, it’s unclear how the cloud shift can “sustain a clear path to double-digit organic growth next year.” More than 70% of Oracle’s (ORCL) revenue are tied to traditional areas, which saw a decline of 1.6% year-over-year this quarter.
The firm also has concerns that Oracle’s (ORCL) cloud growth could “underwhelm” in the future and the need for more capital for its shift to the cloud could be hampered as it competes with the likes of Microsoft (MSFT), which is building between 50 and 100 data centers per year.
Last month, Wedbush Securities said that Russia’s invasion of Ukraine offered investors a change to buy Oracle (ORCL), along with several other tech stocks, at a discount.