Oracle (NASDAQ: ORCL) shares are down a solid 10% following the FQ1/CQ3 earnings report. The shocking news gave the market a reason to sell off, but this is not the time to run for cover. Shares of Oracle are down due to high expectations, tepid performance relative to those expectations, and the perception that cloud growth is slowing.

Reading into the details, it becomes clear that Oracle had a solid Q1, the outlook is robust, and the 10% discount is a buying opportunity.

Here’s why. 

Oracle Grows Almost 9%, Led By The Cloud 

Oracle’s Q1 results were mixed, to be sure, but the headline is far worse than the reality. The company reported $12.45 billion in net revenue for a gain of 8.7%, which fell short of the consensus estimate. Falling short of the consensus estimate is never good, but it’s always relative.

In this case, falling short means 16 basis points or 0.16% compared to an estimate that rose steadily during the reporting period. The takeaway is that Oracle is growing at a near 9% pace, driven by cloud growth. Total cloud grew by 30% to $4.6 billion, while Infrastructure grew by 66%. Cloud Apps, Fusion ERP, and NetSuite grew by 17%, 21%, and 21% to help offset the 10% decline in license revenue. 

Oracle Expands Margins; Improves Free Cash Flow 

Oracle’s results were mixed, with the top line falling short, which means there was strength on the bottom line. The bottom line was driven by thrift, leverage, and mix to drive solid operating cash flow, free cash flow, and earnings increases. The operating income grew by 13% compared to the 8.7% top-line growth, while operating cash flow and FCF grew by 9% and 21%.

The margin strength resulted in adjusted EPS of $1.19, up 15.5% compared to last year, and good news for dividend investors. The EPS also beat the Marketbeat.com consensus by $0.04 or 350 basis points, and the strength is expected to hold. 

The Q2 Outlook Dims but AI is Still in Its Earliest Phases

Oracle didn’t give formal guidance, and the Q1 results led to some downward revisions for Q3, but all is not lost. The recent upswing in cloud and AI spending is the current wave in a sea whose tide has turned. Investment in Oracle’s cloud may slow now, but those investments will start paying off over the next year or 2, leading to another wave of growth.

Among the evidence for this is the $4 billion in contracts cited by chairman Larry Ellison for the company’s Gen 2 cloud. The Gen 2 Cloud provides a complete set of tools for managing diverse data sets and is well-suited to AI. According to Mr. Ellison, Oracle’s RDMA interconnected NVIDIA (NASDAQ: NVDA) super-clusters are 2X faster at training AI models and cost half as much for end-users.

The Analysts Like Oracle’s Position With AI and Cloud

The analysts haven’t had much to say in the first 12 hours since the earnings release, and revisions will surely come.  Until then, the trend in sentiment has been bullish, with nothing but boosted targets, new coverage, and upgrades since early March. The consensus is slightly above the post-release action, suggesting the market is fairly valued within its new range, while the most recent activity has it trading well above.

The most recent targets include the new high price target of $150, which was set a week before the release and puts the market at a new high. 

The Technical Outlook: Oracle Consolidates at Record Highs

Oracle’s 10% correction is nothing to ignore and could lead to further downside. However, the decline may find support near the $114 level, which marks the bottom of a major consolidation range. That range was entered in June following the Q4 results, including strength in cloud and AI segments.

Assuming the market can maintain support at this level, Oracle shares should move sideways over the next few quarters until the next wave of AI excites the market. If not, shares of Oracle could fall to $110 or lower, but that seems unlikely. The stock trades at only 22X earnings compared to 30X for most blue-chip tech stars.