The Future Of Oracle
Database giant reports, Wall Street revolts.
I'm not a huge bull on ORCL, but I think investors may need a dose of perspective here.
Here are my bullish and bearish take-aways:
1. Note the headline, 30% Profit Rise. While forecasted profits didn't crush analyst expectations, they're still very good. In the current environment, many companies would kill for the quarter ORCL just had. Where ORCL really shines, however, is on a relative basis compared to mature companies in other sectors. We're seeing massive earnings declines (and in guidance) in housing, retail, finance, auto, but ORCL is still expanding.
2. ORCL's valuation is becoming more compelling on this pullback. ORCL isn't dirt cheap but is far from expensive. At today's level the Price/Earnings to Growth, or PEG, is right around one. Not many American companies this size are guiding for 14-18% revenue growth.
3. ORCL has for some time pursued a roll-up strategy. After the tech bubble, the firm realized it could buy competitors selling at huge discounts. This strategy allowed them to grow quickly, but in a cost effective manner. I think ORCL has executed this strategy quite well. This type of acquisition will typically create a higher growth trajectory on the bottom line than the top line. This is precisely what has occurred in ORCL's case.
4. See above, expect more of the same with the eventual merger with BEA Systems (BEAS).
5. ORCL is well diversified and has built its business across geography and product categories.
6. ORCL has significant financial clout, which will allow the firm to continue its buyout strategy. It should benefit from the macro-driven weakness and low stock prices.
1. ORCL isn't known for its organic growth. However, this is a known fact and companies that pursue a roll-up strategy tend to forgo growing revenues from within to focus on growth of cash flow and earnings.
2. The macro environment will affect ORCL more than niche software providers. The deeper the slowdown the more negative for ORCL, as well as other companies heavily dependent on the U.S. economy.
3. At some point ORCL may face similar headwinds as has Microsoft (MSFT). It could run into Department of Justice issues and be forced to pursue mergers in areas where it has less expertise.
4. Competition is stiff in ORCL's space and many other players are also best of breed names. Missteps are magnified. IBM's (IBM) acquisition of Cognos comes to mind and MSFT is not sitting idly by in their data base initiatives either. There are a host of smaller, but strong players that could always come up with "the next big thing."
Many investors will wrestle with what the next quarter is going to look like. I tend to focus a little farther out.
Oracle's chief financial officer, Safra Catz, said some customers "got a little more cautious" about their spending during the third quarter, on which she partly blamed the company's cautious fourth-quarter guidance. "Deals are getting done, although they took a little longer than anticipated later in the quarter," she said.
These comments seem to point to more of a deferral issue than lost business. Time will tell as we've seen this type of behavior before. The company expects net income of 43 cents or 44 cents per share in the fourth quarter, excluding one-time charges, and expects sales to increase 15 percent to 19 percent. These numbers don't point to an imminent cliff jump for enterprise software purchases.
There could be "quite a bit of upside, but we want to be cautious," Catz said.
This short statement sums it up well. Near term caution, while focusing on longer term growth. This quarter from ORCL seems a lot like Cisco's (CSCO) last quarter. We've collectively hit the air pocket. Lots of business leaders got "spooked" - to put it mildly. We're now coming to grips with what sectors will experience longer term declines in business and which ones are going to rebound and experience -- or sustain -- higher levels of growth.
I'm not a buyer on today's drop but another point or two of weakness and shares could offer compelling risk-reward. Call it three or maybe even four-to-one upside versus downside from the mid-$18's.
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