Citi: Oracle's Earnings Stabilizing, Yet Prefers SAP On Lower Cloud Risk

Citi said the fourth-quarter earnings of Oracle Corporation (NYSE: ORCL) showed more signs of stabilization, but the firm still prefers rival SAP SE (ADR) (NYSE: SAP) due to reduced cloud risk and stronger business trends.

The business software giant's EPS missed street by $0.01, despite better-than-expected FX. However, it did meet the low-end of guidance. Total revenue was slightly ahead of expectations and flat with last year in cloud computing; the company raised its cloud outlook for the first quarter.

"We think 4Q16 results showed more signs of stabilization as cloud continues to accelerate and has reached run-rate to offset license declines," analyst Walter Pritchard wrote in a note.

However, Pritchard stuck to his Neutral rating amid "lingering questions on profitability and database transition."

Related Link: Analyst Prophesy A Return To Growth At Oracle

Oracle's first quarter top-line guidance of +2–5 percent year-over-year was 1–2 points above expectations driven by SaaS/PaaS (guided to +75 percent–+80 percent year-over-year versus expectations of about 60 percent). The company is benefiting from recent acquisitions of Textura and Opower.

"We estimate this could boost 1Q17 SaaS/PaaS revenue by ~$50 million/10 pts, though this still points to underlying SaaS/PaaS acceleration driven by expirations of discounts based on our math. EPS was guided essentially in-line with us/street and management commentary suggests modest OPM growth y/y in FY18," Pritchard highlighted.

Pritchard, who raised his price target by $4 to $41, also raised his FY17 revenue/EPS estimate to $38.39 billion/$2.73 from $37.31 billion/$2.63. Street expects earnings of $2.81 a share on revenue of $37.69 billion.

"[T]hough we continue to see opportunity for relative outperformance vs. Microsoft Corporation (NASDAQ: MSFT) as both face cloud transition and numbers downside, but valuation spread is at historically wide levels," Pritchard noted.

At the time of writing, shares of Oracle were up 3.08 percent on the day, trading at $39.83.