Ticker Reports for September 10th
Oracle Can Turn the Magnificent 7 Into 8: Here's Why
Oracle (NYSE: ORCL) will have to triple in value to hit the $1 trillion mark and have a valuation on par with today’s Magnificent 7, but it can do it. Its FQ1/CQ3 results reveal its growing importance to Internet infrastructure, the cloud, and AI, which is accelerating revenue and earnings growth. The critical detail is that its shift from products to cloud services was revolutionary and game-changing, and it set it up to become the leading provider of database solutions and AI infrastructure today.
A new partnership with Amazon (NASDAQ: AMZN) is one of the latest developments driving Oracle's business. The deal makes Oracle the leading cross-cloud solution embedded into every hyperscaler's cloud, opening access to virtually 100% of the growing addressable market. Oracle will go live at AWS later this year and accelerate growth again.
Oracle Says Cloud Growth Will Accelerate This Year
Oracle had a solid quarter, with growth accelerating to nearly 7% and revenue of $13.3 billion in FQ1. The strength was driven by a 45% gain in IaaS or cloud services, offset by a smaller 10% gain in SaaS. Critical details with the SaaS segment are that Oracle's Fusion Cloud ERP and Netsuite Cloud ERP are driving growth with 16% and 20% gains, respectively. Another critical detail is that cloud services became the largest operating segment, driving wider margins and accelerating earnings growth.
The margin news was good. The company logged a 400-basis-point improvement in total operating expenses to widen the operating income margin to 30%. Adjusted operating income is up 13%, outpacing revenue by 720 basis points, leaving earnings up 18%, and strength is expected to continue as new cloud regions come online and drive SaaS business. Chairman Larry Ellison says there are over 162 data centers built or in-process, expected to hold acres of NVIDIA GPU clusters, with dozens of cloud regions still to come online for Microsoft (NASDAQ: MSFT), (NASDAQ: GOOGL), and now AWS.
Oracle’s Growth Is Not Priced Into the Stock
Oracle’s growth is yet to be priced into the stock because the remaining performance obligation or RPO, the net value of yet-to-be-completed contracts, is growing, and growth is accelerating. RPO is up 53% year over year, aided by 42 new cloud GPU contracts signed in the quarter, and equal to nearly two years of revenue at the Q2 pace. Partnerships with MSFT and GOOGL drive Q2 RPO growth, which will accelerate again as AWS cloud regions come online later in the fiscal year.
The stock’s value is seen in the price multiple and the analysts' response. The stock trades at a 20x earnings multiple, which is low compared to the average S&P 500 company, let alone the leading AI players with growth accelerating, so a price multiple expansion is likely. ORCL stock also pays a safe and reliable dividend, adding value to the investment. The dividend is worth about 1.15%, with shares near $155, and is only 25% of the earnings consensus reported by MarketBeat. There are no red flags on the balance sheet; it is a fortress with cash rising, assets up, liabilities flat, and long-term debts only 1.05x the cash position, so distribution increases are expected to continue robustly.
Oracle Rockets Higher: Analysts Upgrade ORCL Stock
Oracle stock rocketed higher following the Q2 release, aided by the outlook and analysts' activity. MarketBeat tracked over a dozen reports within the first 24 hours of the release, including numerous upgrades and increased price targets. The consensus of the revisions is that Oracle is a Buy/Strong Buy headed to the $175 to $180 region, a nearly 15% gain from $155 and larger gains are expected over the longer term. The stock is in a sustainable uptrend driven by accelerating earnings growth, and the growth cycle has just begun.
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Palantir Stock Is Up 14% on S&P 500 News: Is It Time to Buy?
Shares of Palantir Technologies Inc. (NYSE: PLTR) have climbed more than 14% after the announcement that the company will be included in the rebalancing of the S&P 500 index. The announcement came after the market closed on Friday, September 6, sending the stock sharply higher. In addition to Palantir, Dell Technologies Inc. (NYSE: DELL) and Erie Indemnity Co. (NASDAQ: ERIE) will join the index on September 23, 2024.
The S&P 500's rebalancing is a zero-sum event. That means for every company added, another company must fall off. In this case, Palantir is replacing American Airlines Group Inc. (NASDAQ: AAL).
The Third Time Is the Charm
To be included in the index, a company has to meet several key benchmarks, including:
- Have a market cap of at least $12.7 billion
- Reporting a profit in its latest quarter
- Reporting a cumulative profit in its four most recent quarters
Based on that criteria, this announcement wasn’t necessarily a surprise. However, Palantir was turned down for inclusion into the S&P 500 index the first two times it was eligible, so many retail investors who have been with PLTR stock since the beginning were not taking things for granted.
Why Is This Important?
The significance of PLTR stock being added to the S&P 500 index is due to the increased buying that will take place with institutional investors. At the time of the announcement, approximately 45% of the stock’s float was owned by institutions.
However, now that the stock is included in the S&P 500, fund managers who track the index will buy it to reflect this addition in their portfolios. That will be bullish for the stock. One of the largest asset classes to watch is passive exchange-traded funds (ETFs), which have $11.4 trillion in value and use the S&P 500 as a benchmark.
Palantir’s Biggest Supporter Is Bullish
Dan Ives of Wedbush has referred to Palantir as the “Lionel Messi of AI.” Ives recently raised his bull case price target for PLTR stock to $50. Ives believes that Palantir’s inclusion in the S&P 500 is “wholly deserved” and remarked that “We believe many skeptics of Palantir have underestimated the profitability and cash flow potential of this name with AIP and the US commercial business a core driver of the business model going forward.” The analyst added, “getting added to the S&P 500 Index is an important moment in the Palantir story that we believe marks a new era of enterprise growth and profitability over the next few years.”
Ives also reiterated his Overweight rating on PLTR stock and maintained a 12-month price target of $38 which is the highest given by any analyst.
Getting Involved With PLTR Stock
It’s tricky, and you may not want to go all in at $34 a share. Inclusion in the S&P 500 doesn’t remove the concern that PLTR stock may be overvalued. Palantir is trading at 31x sales and has an eye-watering forward price-to-earnings (P/E) ratio of 182x. Plus, the stock is one of the leading technology stocks and was already up 75% in 2024 before the announcement. Skeptics don’t deny that Palantir is a growing company. But they believe that years of that growth is priced into the stock.
On the other hand, Palantir has continued to beat revenue and earnings expectations on a sequential and year-over-year basis. Analysts expect the company to grow annual earnings by an average of 30% for the next three to five years. Plus, the company’s balance sheet is strong, with $4 billion of cash and zero debt.
A key reason for the company’s growth comes from its ontology, which allows both its government and commercial customers to generate significant insights from artificial intelligence (AI). This addresses a key concern that AI has to go from being a novelty to something that will generate profit for businesses.
If you’re looking to buy PLTR stock at the absolute best price, you’ll be hoping that the market volatility will bring the stock down to a better entry point. However, if you’re a long-term investor who believes, as Ives does, that Palantir may be a $50 stock (or higher) in the future, then it’s safe to start building a position now.
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Don't Miss Out: U.S. Steel Stock Poised for a Major Rally
The stock market occasionally offers investors an unfair risk-to-reward setup to take advantage of some of the best and most stable stocks. Today, there’s no apparent recession or systemic discount across the market. Still, some stocks have traded at such low valuations that the potential opportunity is undeniable. This is especially true as the new business cycle is preparing to shift.
Today, a takeover from Nippon Steel Co. (OTCMKTS: NISTF) has been blocked, leaving United States Steel Co. (NYSE: X) to exit the market on its merit. The timing of the takeover blockage is interesting to watch, especially as the Federal Reserve is looking to cut interest rates as soon as September 2024, which might have been enough to stop the sale of one of America’s core manufacturing stocks.
The macroeconomic trends triggered by interest rate cuts could send United States Steel stock on a recovery path, especially as other names dependent on American steel, like Caterpillar Inc. (NYSE: CAT) and Cemex (NYSE: CX), come back online to ramp up demand orders as construction and trade activity shift to the better side of the scale.
Responsive Buying Signals Bullish Market Sentiment on United States Steel
When stocks sell off fast and unexpectedly, two things tend to happen. The first is what’s referred to as a poor low, meaning no buyers respond to the new low price to show them an unfair advantage and upside if they can lock in these lower prices.
The other way markets react is to accept this new low price as the reality, as new information (such as the blockage of a takeover bid) is assimilated and accepted for the current price. The fact that United States Steel sold off by nearly 30% after the news announcement, then quickly rallied by 4.3% the next day, shows investors there are responsive buyers now.
Rejecting the low prices is a start for investors to lean on a potentially bullish thesis in this company, realizing that the market thinks the stock’s fair value is above the recent sell-off levels. However, the market is not alone in this thinking.
Wall Street analysts now forecast up to 23.7% earnings per share (EPS) growth for United States Steel in the next 12 months, far from what a company that is supposedly going under should do. Based on this forecast, Morgan Stanley has landed on this stock's $49 price target, daring it to rally by as much as 56.5% from where it trades today.
Uncovering the True Source of Upside in United States Steel Stock
Investors need to remember that currency valuations are typically driven by interest rates just as much as they are driven by demand. Now that the Fed will cut interest rates this month, a weaker dollar could be expected in the coming months.
Weaker dollars mean more attractive deals for foreign buyers with stronger currencies like Mexico. Mexican-based Cemex relies on United States Steel to make its products and meet demand, so the company now has a guaranteed buyer.
Lower interest rates and cheap oil prices today also set the scene for hotter business activity in the coming quarters. The construction sector’s rise calls on Cemex, which in turn calls on United States Steel.
Caterpillar is another buyer of United States Steel, indirectly though still important to consider in the future of the steel provider.
Even after the incredible sell-off in the stock, bears are staying away from it in the middle of this unprecedented volatility. United States Steel stock’s short interest declined by 2.1% over the past month and has been steadily declining since the first quarter of 2024.
Why U.S. Steel's Current Valuation Favors Bulls Over Bears
Investors shouldn’t be surprised when and if they see a few institutional buyers entering the stock once the 13-F filings are released. Those at Sanctuary Advisors recently initiated a $491,000 position in the stock on the day the sell-off took place.
Investors need to understand that today’s price, a mere 62% of United States Steel’s 52-week high, is accountable for the potential opportunity present in the company’s future. On a price-to-book (P/B) basis, the company trades at 0.6x, or a 40% discount on its equity.
Why anyone would look away from a 40% discount in equity set to grow by double-digits this year and generate double-digit returns on equity (ROE) rates is beyond debate. However, the conclusion for all retail investors here is that the risk-to-reward scale favors bulls today and not bears, especially with current valuations and future catalysts.
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