Oracle Stock Sank After Earnings -- Is It a Buy?

Oracle (NYSE: ORCL) stock reported its latest quarterly report after the market closed on Sept. 10, and wound up falling 1.7% in the next day of trading. While the stock had been up as much as 8.5% in the daily session following the earnings report, it couldn't hold on to its gains. Meanwhile, the S&P 500 and the Nasdaq Composite each closed out the day up 0.9%.

After a run of sell-offs in the week, investors responded positively to the latest Consumer Price Index (CPI) inflation report from the Bureau of Labor Statistics and bought back into stocks even amid higher expectations that the Federal Reserve will raise interest rates at its next meeting. The market also initially had a positive reaction to Oracle's report for the first quarter of its 2027 fiscal year, which ended Aug. 31, but initial positive momentum didn't hold.

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Oracle's results looked strong in fiscal Q1

Oracle's fiscal Q1 sales and earnings beat Wall Street's expectations. Strong growth for the company's artificial intelligence (AI) cloud business pushed sales up nearly 30% year over year to $19.4 billion, easily topping the average analyst estimate for sales of $19.1 billion. Meanwhile, non-GAAP (adjusted, and not in accord with generally accepted accounting principles) earnings per share of $1.92 beat expectations of $1.74.

Along with the report, the company also raised its full-year sales outlook to at least $90 billion and said that it expected adjusted earnings per share of $8.10. Previously the company had forecast revenue of roughly $90 billion and adjusted earnings per share of $8.05.

Why did investors sell Oracle stock after earnings?

The company's latest business report looked strong, but there were a couple of sticking points for investors. For starters, the company announced roughly $700 million in restructuring charges tied to layoffs and other parts of the project. Although these expenses will hurt earnings in the near term, the restructuring moves could wind up being a net positive over the long term.

Oracle founder Larry Ellison also revealed a plan to sell as many as 50 million shares of company stock. At current price levels, the sale would work out to roughly $7.5 billion. While Ellison's planned stock sale wasn't necessarily a negative indicator for Oracle's operations, it's also not the kind of thing investors like to see and has the potential to put pressure on the company's shares in the near term depending on how the sales are carried out.

But Ellison actually subsequently came out said he was canceling the planned stock sale. Notably, Ellison would still own roughly 1.1 billion shares even if he had gone through with it.

Although Ellison's stock sale seems to be off the table in the near term, some investors likely have some lingering problems about the company's debt. Oracle ended fiscal Q1 with $36.3 billion in cash and equivalents against debt of roughly $117 billion -- which doesn't look terribly concerning in light of the business's strong sales and earnings performance.

Conversely, Oracle has spent heavily to build out its AI compute infrastructure capabilities -- and a huge amount of its future business is tied to a $300 billion deal it has with OpenAI. Due to OpenAI's business being untested, some investors feel less confident in Oracle's spending and debt.

Is Oracle stock a good buy right now?

As of this writing, Oracle stock is down roughly 26% year to date and 56% from its all-time high. The company's projection for this year calls for revenue to rise grow roughly 34% and adjusted earnings to increase about 19% even with relatively high spending. Meanwhile, the company is trading at roughly 18.6 times this year's expected earnings.

On the heels of sales growth of roughly 17% in its last fiscal year, Oracle is seeing a strong acceleration in growth this year thanks largely to huge gains for its cloud computing business. While the company has substantial debt and capital expenditures that could create problems if the company's big deal with OpenAI doesn't pan out, the stock looks reasonably valued at current prices. With strong sales growth and the potential for earnings growth to accelerate as spending falls, the shares look like a worthwhile buy.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.