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What happened

Shares of Oracle (NYSE: ORCL) were falling today as the company reported fiscal first-quarter results that were essentially in line with estimates, but slowing cloud growth led the stock to sell off. It had impressed the market in its prior report with accelerating cloud infrastructure growth.

As of 10:44 a.m. ET, the stock was down 11.8%.

So what

Oracle said total revenue rose 9% to $12.45 billion, which essentially matched estimates at $12.47 billion.

That growth was driven by a 30% increase in cloud revenue to $4.6 billion, which included 66% growth in cloud infrastructure to $1.5 billion and 17% growth in cloud application to $3.1 billion.

Smaller legacy segments like cloud and on-premise licenses and hardware continued to decline, and profit margins expanded modestly in the quarter, with adjusted operating income improving 13% to $5.1 billion and adjusted operating margin reaching 41%.

Adjusted earnings per share (EPS) jumped 16% to $1.19, edging out estimates at $1.15.

CEO Safra Catz said, “Oracle Cloud Infrastructure revenue grew 66% in Q1, much faster than our hyperscale cloud infrastructure competitors” and said of its cloud services business, “This highly predictable, highly profitable recurring revenue stream — combined with continued expense discipline — drove 16% growth in non-GAAP earnings per share, 21% growth in free cash flow, and $7.0 billion in operating cash flow in the Q1.”

Now what

Despite the solid results, the company called for a deceleration in revenue growth in the second quarter, forecasting 5% to 7% top-line growth, or 3% to 5% in constant currency, to $13 billion, which was below the consensus at $13.29 billion. The slowdown was due in part to headwinds at Cerner, a healthcare IT company that Oracle acquired last year and is currently in the middle of moving to the cloud.

On the bottom line, it expects adjusted EPS of $1.30 to $1.34, which was ahead of estimates at $1.25.

Oracle’s sell-off today seems as much a reflection of high expectations baked into the stock coming into the report than anything else, as shares were up more than 50% year to date before the results came out.

While its cloud services growth remains impressive, the stock seems reasonably priced at a forward P/E of 20, considering its modest overall growth.

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Jeremy Bowman 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.

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