Friday, March 13, 2020

Coronavirus Unlikely to Infect Oracle’s Business

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What’s happening: Oracle Corp reported stronger-than-expected results for its third quarter, beating estimates for both revenue and profits.

What happened: Shares of the tech giant had plummeted 11% during regular trading hours on Thursday to reach its lowest level in two years, amid a broader downturn in the US equity market. However, the stock gained more than 4% in after-hours trading, flowing Oracle’s results, which included the company’s strongest sales growth in around two years.

While announcing the outlook for the fourth quarter, the company’s top management explained why Oracle was in a position to cushion the coronavirus blow.

  • Oracle reported adjusted third-quarter profits of 97 cents per share, versus 87 cents a share in the same quarter in the previous year. The figure was ahead of the consensus estimate of 96 cents per share.
  • The company’s sales quarterly grew 1.9% to $9.8 billion, beating expectations of $9.75 billion.

Why it matters: Oracle’s CEO Safra Catz said it is a little tricky to project future sales, as the impact of the coronavirus pandemic on supply chains and customer spending was still uncertain. Catz added, however, that so far at the company it had mostly been “business as usual.”

CEO Safra Catz and CTO Larry Ellison highlighted that Oracle’s business model, which has “changed radically” since the dot-com bubble burst in the early 2000s, seems suited to cushion the blow of coronavirus-related disruptions.

Oracle’s sales and service delivery are now mostly in digital formats. “We do digital selling, digital support, we’re communicating with you across the internet,” Ellison said. Moreover, over the years, the company has moved from having lots of smaller offices across the US and the world to a “hub model” in Texas and California. This minimizes travel and eases workforce management during the coronavirus crisis.

Another advantage that Oracle has is that it has shifted to a subscription-based offering, from its earlier license-based one. The latter could have weakened due to the coronavirus outbreak and in the event of an economic recession. However, during periods of crisis, companies prefer subscription-based offerings, as their focus is on lowering costs.

The virus outbreak has highlighted the need for digitization and companies that so far didn’t have an online presence are considering investing in it. With this, cloud service providers could experience a boost in demand for their offerings.

The virus outbreak has highlighted the need for digitization and companies that so far didn’t have an online presence are considering investing in it. With this, cloud service providers could experience a boost in demand for their offerings.

After spending $13.9 billion on share repurchases in the first nine months of this fiscal year, the world’s second-largest software maker announced an additional authorisation of $15 billion. This could support its share price.

Recent stock performance: Shares of Oracle have been affected by the wider sell-off in the US stock market. However, even before this, the company’s stock was not performing well. The stock has lost more than 24% over the past year, versus a 1.8% decline in the S&P 500.

What to watch: Although Oracle’s business model is strong and the company is well positioned for the projected growth in digitization, it has been facing stiff competition from mammoth public-cloud companies like Amazon and Microsoft. News of Oracle gaining market share or shifting its current database clients to cloud-based applications would be positive for its stock.

Investors also await updates about Oracle’s AI-driven Autonomous Database product. Moreover, the company has been looking to lower its costs over the past couple of years. Progress on this front would also support the shares.

The Markets Today

     

Investors will be focusing on European stocks today, with the markets recording their worst single-day decline in history on Thursday.

Context: European shares suffered a historical downturn on Thursday, following US President Trump’s decision to impose travel restrictions from European nations and the ECB’s announcement of keeping its benchmark rate unchanged. Travel and leisure shares suffered the most after President Trump imposed the travel ban.

Details: President Trump announced the suspension of all travel from 26 European countries to the US for a month, in a bid to curtail the spread of coronavirus. The restrictions will be implemented from Friday midnight to those countries that are part of the visa-free Schengen area. The UK is so far exempted from the new rules. Trump also blamed Europe for not implementing enough measures to control the COVID-19 spread, with Italy being the worst hit after China and facing a nationwide lockdown.

The WHO has officially declared the COVID-19 outbreak a pandemic, with the virus affecting at least 133,000 persons worldwide and taking more than 4,900 lives.

The ECB disappointed investors by keeping interest rates unchanged, as markets had been expecting a rate cut to ease the coronavirus impact on the economy. In fact, expectations were for a rate cut of as much as 10 basis points.

The central bank did announce new stimulus measures to support the economy, by increasing its QE (quantitative easing) program by €120 billion.

The Stoxx Europe 600 index plunged 11% on Thursday, while the FTSE 100 declined 9.8%. Italian stocks suffered their worst one-day decline, with the FTSE MIB closing around 17% lower. The French 40 and German 30 also lost more than 12% each.

In corporate news, shares of Dufry tumbled more than 40% after the company issued a weak outlook amid coronavirus concerns. Shares of British company WH Smith also shed 20% with the virus starting to hurt its sales at airport locations. Tullow Oil’s shares plummeted 30% following the decline in oil prices.

Why it matters: After falling to record lows in Thursday’s session, investors will be hoping for a rebound in European stocks today. Investors await the basket of Eurozone economic reports scheduled for release today, including inflation data from Germany, France and Spain.

What to watch: Investors will be keeping an eye on coronavirus reports from various countries. Germany’s Consumer Price Index is expected to increase 0.40% in February. Consumer prices in France are projected to remain unchanged in February, versus a 0.4% decline in the earlier month. Spain’s Consumer Price Index is expected to decline 0.10% in February.

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What else to watch today

     

Turkey's industrial production and retail sales, India’s deposit growth and foreign exchange reserves, Mexico’s industrial production, Russia’s balance of trade, China’s foreign direct investment as well as the US University of Michigan consumer sentiment index and Baker Hughes crude oil rigs report and export and import prices.