Tuesday, March 30, 2010

Oracle, Databases, Verticals and Business Intelligence

Oracle (ORCL) reported on its third fiscals quarter ending February 28, 2010 last Thursday. Along with other technology companies with fiscal calendars and some guidance changes, all indications are that the quarter ending December 31, 2009 was not an anomaly for the industry. Both consumers and businesses are resuming their purchases of hardware and software. While some areas of the world are now lagging, particularly Europe, on the whole the increase in demand is broad based. The release an adoption of Microsoft Windows 7 as well as new PC CPUs from Intel and AMD is making the refresh cycle attractive for servers, desktops, and laptops. The high-end cell phone craze is just adding to the rally. With some exceptions, technology stocks are undervalued, but probably will remain in that state until more money comes out of bonds and into stocks.

I'd buy Oracle right now for myself if I had a larger portfolio and wanted another relatively large cap stock. I believe Oracle is going to continue to eat SAP's and IBM's lunch, and probably steal some of Microsoft's afternoon snack as well. Now that Sun has been swallowed by the great white whale, or shark, companies that make high-end database server hardware need to fear Oracle as well. In Thursday's analyst conference Oracle management explained that they are already tearing out the unprofitable parts of Sun, like commodity hardware, and focusing on ramping the profitable parts. Sun has impressive hardware; combining it with Oracle's databases and other enterprise software application packages is going to allow companies to get bundles of value for their most demanding applications like transaction management. The Oracle hardware system for this is called Exadata, and it may prove to be a giant killer. Coming soon is the integration of Oracles software packages in Fusion, with will have built-in, across the board Business Intelligence (BI).

Microsoft, of course, is a far more diverse company than Oracle. It has a gravy train in its Windows operating system that is still under no real threat from Linux. Its database system for businesses, SQL Server, is competitive at every level from the home office to the enterprise. But at the enterprise level, SQL Server's main advantage is ease of use and integration into the legion of Windows PCs on corporate networks. For truly big enterprises, Oracle has two major advantages apart from its database's quality. Oracle is able to target verticals, which are industry segments like oil, financial services, and biotechnology, in a way Microsoft cannot. It also has a broader and probably better set of applications that are enterprise-specific such as ERP (enterprise resource planning). Oracle does not need to compete with Microsoft Office, and Office is just not that big of an edge when an enterprise is looking at something like a transactional database to deal with Internet content provision and commerce.

See also my Oracle analyst conference summary for fiscal Q3 2010 and www.oracle.com

As I write, according to Nasdaq, Oracle stock is trading for $25.36 cents, giving it a (non-GAAP) P/E of 16.6 and a forward P/E of 13.6. Which equates to annual earnings on investment of 6% and 7.35%. Which, however well it compares to other technology stocks, is way, way better than being in bonds, which are particularly unsafe now since any increase in interest rates will cause the sale value of past-issued bonds to fall.

But do Keep Diversified!

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