Oracle Corp. shares have moved 30% higher over the past month as the company has earned recognition for artificial-intelligence initiatives, but one credit analyst still has concerns about the company’s leverage.
“Oracle is making significant progress and we have less conviction in our underperform recommendation,” Gimme Credit analyst Dave Novosel wrote in a note to clients Thursday. “But until we see lower leverage we are staying with our call.”
While Oracle
ORCL,
grew revenue by 17% in its latest quarter, Novosel has doubts about whether the company’s momentum is sustainable.
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“The bulk of the expansion was attributable to the Cerner acquisition,” he wrote. “That deal has now cycled so Oracle will lose a key driver of its growth.”
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Oracle announced its nearly $30 billion deal for Cerner in late 2021, which marked a big bet on the healthcare space and the market for software that helps doctors manage records.
Novosel noted that the Cerner deal has “eroded margins” even as it’s been beneficial for Oracle’s revenue line.
“Oracle expects to bring Cerner margins up to those of the legacy operations, but that will take some time,” Novosel said. “We expect gross margins to decline modestly this year despite the benefit of economies of scale in its cloud operations.”
He expects that the company’s free cash flow will be “a bit better this year” than in fiscal 2023, when Oracle logged nearly $5 billion on the metric.
“All of that was employed in the Cerner acquisition,” he said of the fiscal 2023 free cash flow. “Dividend payouts have been increased substantially. And capital expenditures are likely to be high again, or more than 16% of revenue, as the company expands capacity via more cloud regions to meet the increased demand for Gen2 OCI,” meaning the Oracle Cloud Infrastructure product that helps companies run workloads.
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He anticipates that Oracle will put about $2 billion of its free cash flow this year toward reducing debt, which along with improvements in earnings before interest, taxes, depreciation and amortization (Ebitda) could help bring the company’s leverage ratio down to 4.3 times from 4.7 times, though he said it would remain high.
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