Yesterday Oracle (ORCL) issued stunningly good results for its 4th fiscal quarter (Q4) 2011 ending May 31st. The price of the stock promptly took a major dive in after-hours trading, and is still down substantially as I write.
Usually when this sort of thing happens, a good report followed by a price fall, it is because either: (1) investors expectations were even higher or (2) guidance for the next quarter is below analyst expectations.
This time the issue is something far more specific: the revenue derived from a specific segment, computer hardware, that was acquired with Sun Microsystems last year. Before reading my commentary below, you might want to first familiarize yourself with Oracle quarter results with my notes on Oracle Q4 2011 Analyst Call.
Despite an overall increase in Oracle revenues of 13% from year earlier, hardware systems product revenues were $1.16 billion, down from $1.23 billion in the year-earlier quarter. That raised some flags with some analysts. Which mostly shows these guys have too many stocks to cover, or were hired for their connections, not their analytic ability. Oracle management explained their strategy before, and they explained it again during the question and answer session.
I'm with management on this one: Sun was poorly run from a business perspective, and Oracle is not obligated to repeat Sun's business mistakes. Rather than looking at specific products, Oracle looked at the overall Sun problem: low margins. Fortunately, those low margins were not all of a kind.
Oracle decided to stop selling low margin computer hardware products whenever possible, with the exception of those that margins could be raised over time. So a year later, they are selling slightly less product, but making far more profits on it. Not only that, but they are gearing up to sell a lot more product, in particular their Exadata and Exalogic lines. What is there not to like about that?
Oracle is a rapidly growing, undervalued technology stock. We are not in a tech bubble. A gold bubble, yes. A bond bubble, yes. Idiots are holding bonds at this point. Bonds are trash, in most cases not bringing in enough returns to keep even with inflation. Their principal is just as much at risk as it would be if invested (wisely) in quality stocks.
I don't own Oracle stock at this point, but with the price drop and a bright future, I could buy ORCL in my next buying round. The competition is mainly small cap tech and biotech stocks that may grow even faster, and yet are also cheap right now. [See what I own at William Meyers current stock portfolio]
One aspect of the situation not mentioned was Oracle's current war with HP over Intel Itanium based computers. I don't see much downside for Oracle here. Oracle software can run on many types of hardware. Itanium was always a bad idea, and Oracle should not be obligated to support two different Intel chip architectures.