Buy low, sell high. That simple investment strategy works well over and over again. An investment opportunity presents itself when a great company is beaten down in the stock market. Recently, Oracle Corporation (NASDAQ:ORCL) dropped significantly, from around $36.30 per share to nearly $32 per share, losing more than 11.8% of its total market value.
The huge decrease in its stock price was caused by its recent, weaker-than-expected earnings results. Should investors consider this drop an investment opportunity? Let’s find out.
A small earnings glitch
Oracle Corporation (NASDAQ:ORCL) generated nearly $8.96 billion in revenue and non-GAAP earnings of $0.65 per share, lower than analysts’ estimates of $9.38 billion revenue and $0.66 EPS, respectively. While revenue from software license updates and product support experienced a year-over-year growth of 7% to $4.34 billion, revenue from new software licenses and cloud software subscriptions declined nearly 2% to $2.3 billion.
GAAP net income experienced a small decline of 1% to $3.1 billion. GAAP EPS came in at $0.52, a 6% growth compared to the EPS last year. The increase in GAAP EPS was partly due to the share buybacks in the past twelve months. Oracle Corporation (NASDAQ:ORCL)’s shares outstanding have been reduced from more than 5 billion to around 4.81 billion.
A cash cow with a strong balance sheet
What makes me interested is Oracle Corporation (NASDAQ:ORCL)’s strong balance sheet. As of February 2013, it had nearly $43.8 billion in total stockholders’ equity, $16.1 billion in cash, $17.3 billion in marketable securities, and nearly $20 billion in both long and short-term notes payable and borrowings.
As Oracle has made a lot of acquisitions to grow its business over the years, it had a high goodwill amount of more than $26.1 billion. Moreover, the business is really a cash cow. In the past ten years, while its operating cash flow increased from $3 billion in 2003 to $13.7 billion in 2012, its free cash flow rose from $2.7 billion to more than $13 billion in the same period.
Interestingly, Oracle is one of favorites stocks of Lou Simpson, a successful investment manager that Warren Buffett admires. Lou Simpson increased his holdings in Oracle Corporation (NASDAQ:ORCL) nearly 45% in the fourth quarter of 2012. As of December 2012, with 3 million shares, Oracle became Lou Simpson’s third biggest position, accounting for 8.5% of his total portfolio.