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Oracle Earnings: Did Warren Buffett Top-Tick Tech?


Oracle missed big-time last night, calling into question Warren Buffett's timing.

When Oracle's (ORCL) disappointing second-quarter results hit the tape yesterday after the close, my thoughts quickly turned to late October, when IBM (IBM) disappointed with its third-quarter numbers.

And that memory brought back another from mid-November -- Warren Buffett's disclosure of a massive stake in IBM, a position built in secret as the Securities and Exchange Commission allowed the Oracle of Omaha to omit IBM from Berkshire Hathaway's (BRK-A) 13F filings. Buffett has traditionally shied away from technology stocks, so the fact that he became the single biggest shareholder of IBM raised significant concerns about style drift.

While we don't know precisely when Buffett purchased his position in IBM, it hasn't exactly been a down-in-the-dumps value play. Rather, IBM's been all momentum, regularly hitting new all-time highs throughout the year. Year-to-date, it's up 24% versus a 5% gain for the Dow Jones Industrial Average (^DJI).

This means that Buffett shifted from his anti-tech investing style to pile into IBM at all-time highs, right before that company issued a very rare disappointment.

And yesterday, we got a lousy quarter from the equally consistent Oracle, which very interestingly enough has a modus operandi fairly similar to IBM's: enterprise focus + constant acquisitions + cost management + stock buybacks.

Incidentally, Buffett had also disclosed a position in chipmaker Intel (INTC), which lowered guidance on December 12 following a string of pretty impressive quarterly-earnings performances.

And of course, it's also worth mentioning that consumer-electronics retailer Best Buy (BBY) stunk up the joint on December 13 when it reported its third-quarter numbers. (See Best Buy: Weak Sales, Weak Margins, More Buybacks!)

So, yes, it does appear that Warren Buffett exhibited pretty poor timing when he finally jumped into technology by picking up two of the industry's supposedly safer names.

Unfortunately, Oracle did not paint a pretty picture for the near-term outlook for enterprise IT, which could spell trouble for his IBM position.

Here are three key excerpts from the conference call:

First, in the last few weeks, really in the last few days of our November quarter, for the first time in a while in some regions, we saw an increase in last-minute additional approvals required for previously scheduled and expected deals.

Additionally, there was a 2% negative swing as the currency -- as the 1% currency tailwind, included in our September guidance, shifted to a 1% headwind for new software license.

What we did see was folks where all of a sudden the CEO had to approve [a deal] or something like that, where before it was all set. So we haven't had them come back and tell us their budgets are down or anything. And as I said, in some cases, things closed literally the next day or a few days later once the approval came in. But those things, when we do run them sometimes right to the end, you just run out of time.

So there are two important takeaways here.

The first is that companies are getting increasingly conservative when it comes to shelling out big bucks for expensive software and IT hardware. Even if customers aren't pulling back on their purchases, they're slowing down the rate at which those purchases are made, which in itself is a form of budget cut.

The second is that foreign-exchange rates have transformed into an earnings headwind, rather than a tailwind. The weak dollar was a boon for US companies with heavy foreign exposure like Caterpillar (CAT) and McDonald's (MCD), but its recent strength just turned into a problem for Oracle. Incidentally, the consulting firm Accenture (ACN) recently lowered its own full-year guidance due to foreign-exchange trends.

Now we don't know when the Metallica trade -- a.k.a. shorting the euro (see Metallica: Bearish on Euro, Bullish on Rocking Out) -- will end, but in the meantime, a weaker euro should be considered bearish for US stocks.

As for Buffett, I'm surprised that he didn't just buy Apple (AAPL)! It has a cheap valuation, the best consumer brand on the planet, a great management team (even post-Steve), an astoundingly strong competitive position, and a defensible moat in the form of the iTunes/iOS/App ecosystem.

Twitter: @MichaelComeau

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