UPDATE: Goldman Sachs Sees 26% Upside in Oracle (ORCL), Adds to Conviction Buy List

(Updated - November 16, 2015 8:53 AM EST)

Goldman Sachs upgraded Oracle (NYSE: ORCL) from Buy to Conviction Buy with a price target of $47. Despite investor concerns, analyst Heather Bellini said checks point to cloud revenue growth acceleration. She also pointed out favorable risk/reward.

"ORCL shares are down 17% ytd (vs -2% for the S&P) as investors continue to have concerns on the company’s ability to shift to the cloud as well as how this shift will impact its financial profile. Specifically, we believe the market has considerable doubts about its cloud (SaaS/PaaS) FY16 (May) revenue growth guidance of 50%, its gross margin target for this segment of 60%, as well as its bookings target of $1.5 - $2.0bn. Our field checks with partners indicate that ORCL’s cloud revenue growth will accelerate in F2H16, which we see leading to multiple expansion as investors gain greater conviction in its ability to execute on the transition," said Bellini.

"We see our thesis evolving over the next three quarters, with the first evidence becoming clearer on its F2Q16 earnings print (expected in mid-Dec) as guidance should demonstrate that promotional pricing is winding down, and customers are renewing at higher levels of ARR. While recent execution inconsistency might be causing investors to pause, we believe execution on ORCL’s targets will start to help expand the multiple. In fact, if ORCL is successful in attaining FY16 bookings targets (which our field work gives us growing confidence in), we would expect management to guide to accelerating cloud revenue growth in FY17 and with gross margins expanding, we believe FY16 will mark the bottom in non-GAAP operating margins," continued the analyst.

Bellini added, "As consensus FY16 non-GAAP EPS estimates have declined for the last four quarters, with earnings under pressure given the transition, we expect the Street’s focus to shift to cloud execution, which we see as starting to improve."

For an analyst ratings summary and ratings history on Oracle click here. For more ratings news on Oracle click here.

Shares of Oracle closed at $37.30 yesterday.

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