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Oracle Is a Good Investment Despite Weak Earnings

July 26, 2014 | About:



Oracle (ORCL) disappointed the Street as its last quarter earnings and revenue failed to meet consensus estimates. The stock had been doing admirably this year and had touched a 52-week high as of late. However, the tepid results have resulted in a pullback. Oracle shares dropped the most in a year after the results. What's more, Oracle's guidance also failed to match expectations, showing that the company's business has slowed down. In any case, is Oracle worth purchasing on the pullback? Let’s take a look.

In transition mode

Oracle is at present experiencing a difficult time as it is transitioning to the cloud to compete with the likes of Workday (WDAY) and (CRM). However, once the transition is complete, Oracle expects that it will be in a strong position to boost its numbers.

Oracle is as of now making positive moves in the cloud. In the previous quarter, the company saw strength in cloud SaaS (software-as-a-service), PaaS (platform-as-a-service), and cloud IaaS (infrastructure-as-a-service). Moreover, it delivered an enhanced performance in different areas such as software license restoration, designed systems, and NAS storage. Management is optimistic about Oracle's execution.

Development ahead

Going ahead, Oracle expects SaaS and PaaS to grow in the range of 25% to 30%, while Cloud IaaS is expected to grow in the range of 10% to 20%. The company is focused on becoming a force to reckon with in distributed computing in next five years, especially SaaS and PaaS, which are the two most profitable segments in distributed computing as indicated by management. As such, it is focusing on strategies to enhance execution and bolster its position in the segment.

Oracle expects to become the foremost player in distributed computing because of three reasons. First, it has the most complete and cutting edge solutions of SaaS products in the cloud. Second, each one of those SaaS applications run on a powerful platform, the Oracle in-memory, multi-tenant database and are based on the prevalent programming language JAVA. Lastly, Oracle has increased its sales team, which is currently specialized and is lined up to sell SaaS and PaaS to compete against the new era of cloud software competitors such as Workday.

A key acquisition to drive development

Oracle as of now has an edge over Workday in cloud ERP, as it sealed 120 new cloud ERP customers in the final quarter alone. Salesforce is an alternate competitor in cloud solutions, however as indicated by management, Oracle is the pioneer across more cloud solutions than Salesforce. Furthermore, Oracle's agreement to purchase Micros Systems for $5.3 billion will further boost its development in cloud solutions, permitting it to take market share from competitors. Thus, Oracle seems to have made a smart move by purchasing Micros.

Fundamentals and last words

In spite of the fact that Oracle's results were not up to the expectations, management is optimistic about its prospects. As the final quarter numbers were not in line with Street expectations, the stock was in sell-off mode. Anyhow, Oracle has sound fundamentals and is utilizing smart strategies to enhance its performance going ahead.

It has a trailing P/E of under 17, while a forward P/E of less than 12 indicates earnings growth going forward. What's more, Oracle has a profit margin of 28.6% and operating margin of 39%, demonstrating strong profitability. Besides, the company's cash of $39 billion is more than its debt of $24 billion, which means that Oracle has the power to keep acquiring more companies and keep investing in development.

Thus, investors should consider benefitting as much as possible from the stock's pull back and add more shares to their portfolio.

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