Wednesday, July 2, 2008

Oracle (ORCL): Unstoppable?

Oracle is one of those stocks that I always wish I had bought 2 years ago, but if I have a bit of money to invest, there is always something that seems like a better idea right now. Following Oracle's reporting of its fiscal Q4 2008 results and analyst conference on June 25, 2008 (See my summary), the stock price plunged mainly because Oracle was not as bullish about Q1 2009, the current quarter, as investors had hoped. As I write you (or I) can buy ORCL for 21.01 per share. According to the NASDAQ Oracle page, that puts Oracle's trailing P/E at 16.16 and its forward P/E at 14.16. Even in today's market that is cheap for a company that is growing as fast as Oracle does.

How fast? Q4 revenues were $7.2 billion, sequentially up 36% from $5.3 billion and up 24% from $5.8 billion year-earlier. Some of this was due to the acquisition of BEA and other companies.

Oracle says it can maintain this kind of growth because it is pursuing the right strategy for dominance in today's highly competitive software market. When it makes an acquisition, it does more than pick up some software and some new clients. Oracle makes a suite of software available to the clients, maintains backward compatibility (for a while) and integrates the new functionality to be sold to all its current clients. Oracle mainly pursues enterprise sized businesses, although you can run many of it products, like its database software, on a PC or small server if you want to. It also has figured out the vertical market game. It perfects its software suites for a particular market so that the customization process, essential with any software, is minimized. Customers love that.

Oracle is becoming a full-service software provider for enterprises in much the same way that Cisco is a full service network hardware provider. Oracle can provide a corporation with database software and all the management goodies that sit on top of that: CRM, ERP, BI, etc.

Oracle competes with the software big boys, notably Microsoft, IBM, and SAP. It has been gaining market share against all of them. Divide up the typical enterprise software bundle into four parts: the operating system, middleware, database, and applications. SAP can provide the lot, but all of its solutions are proprietary and notoriously difficult to program or customize. IBM certainly knows its way around the enterprise, but does not have a complete middleware suite based on industry standards. Microsoft competes well with SQL Server for databases, but its real power is at the desktop level; it is weak in enterprise-wide applications, plus it is almost all proprietary rather than standards based.

Of course Oracle has its critics. Red Hat reported recently that it is picking up former BEA customers that don't want to follow the company to Oracle. On the other hand, this may be crumbs, given the difference in size between Oracle and Red Hat. Nor would anyone in their right mind write off Microsoft, SAP or IBM in this contest.

A key area of competition is Asia. Enterprises there can get the same efficiencies as European and American corporations when they use the right software systems, and they are adapting ERP, CRM, etc. at a rapid pace. So the overall market is growing globally. If Oracle is able to continue to capture market share as the market grows, it can continue to show impressive growth in revenues and earnings.

I don't think Oracle is unstoppable yet, but I'd certainly be worried if I were running SAP. Talk about a dinosaur that seems to have no idea of how to adapt.

If Oracle paid a dividend I'd be more likely to take a position. Dividend payment shows confidence. I am not a fan of the old idea that technology companies should not pay dividends. Growth is great, but only if you can plan on growing dividends.

More data:

No comments:

Post a Comment