Today is a very exciting day as I’m writing in-depth about two stocks that fit very well among the stocks that I follow:
Oracle Corp. (NYSE:ORCL)
I had initially planned on doing two separate posts but the more research I did, the more convinced I was that both made a lot of sense to look at together. In some ways they are similar, in other ways they are rivals and they could be traded against each other or against other names in the stocks that I follow. Why weren’t these stocks added before? They are clearly tech stocks and are similar to other software companies such as Microsoft (MSFT) and Adobe (ADBE). I also tend to get a better feel for smaller stocks that I’m able to get a better feel on. It’s much more challenging to get a good feeling about a huge company such as Oracle because there are so many different moving parts.
Who Are They?In some ways, it’s a David vs Goliath story. Oracle has over 120,000 employees, over 12 times what SalesForce has but the market does not have such a discrepancy in terms of valuations. In fact, ORCL is less than 5 times the market cap of CRM. Here are some numbers for both stocks:
No surprise in the fact that CRM trades at a much higher P/E. It is after all a “younger” company I was still surprised by the CRM P/E. It reminds me of RAX and the fact that cloud-based companies tend to trade at big premiums because the industry is growing so fast. In some areas, such as hosting, that are so highly competitive, I have trouble buying such a valuation. If a company like RackSpace (RAX) is competing with Amazon (AMZN) and others, I highly doubt their ability to operate at high margins. That is different for CRM which operates in much more attractive area; enterprise services. It’s a highly attractive arena where margins are higher and it’s more difficult for competitors to step in. Strictly technology focused companies such as Google and Amazon will try to offer broad based solutions (such as Google Docs) but are unlikely to move into highly specialized corporate products.
Oracle is a company that I’d tend to compare with Microsoft. It trades at a comparable P/E and still has a highly motivated CEO that is working on catching up. So let’s look at those numbers in terms in a different light:
MSFT vs ORCL
CRM vs RAX
The question of course is how much growth we can expect. The 2 key metrics of course are revenue and earnings growth. In this specific case, I’m not so interested in dividend yields.. but here are some charts that I am paying very close attention to: