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Oracle: Only Innovation Will Spur Gains

April 30, 2012 | About:

Although some may say that tech stocks are a dime a dozen, there are some companies that still stand out. Oracle (NYSE:ORCL), an enterprise software company, is one such example — although its star may not be shining quite as brightly as it used to.

In this article, I discuss why — even though Oracle was at one time a great buy — investors may want to hold back just a bit on this particular stock due primarily to the company's loss of market share to a number of its competitors as well as its somewhat "head in the sand" approach to various technology offerings.

Fundamentally Speaking

Oracle develops, manufactures, and distributes database and middleware software, applications software, and hardware systems all over the globe. The company also runs software licensing, as well as an array of other development and applications functions. Based on the many different and long-term services that Oracle provides, a large part of the company's incoming revenue comes from the offerings related service and consulting.

With a market capitalization of nearly $143 billion, a P/E ratio of just over 15, and a dividend yield of less than 1%, this tech giant could be considered somewhat on the conservative side today as far as wild growth gains on its stock are concerned.

In fact, hovering at just under $29 per share, Oracle is not the company that it used to be — not that it's completely a bad thing. Analysts still predict that the stock will move into the mid-$30s by year end. And while that may not excite some investors, it's certainly a move in the right direction.

On the Competitive Landscape

One issue that the company's stock has been dealing with is that some of Oracle's biggest competitors could be forging ahead to beat Oracle at a game it used to win hands-down. For example, Microsoft (NASDAQ:MSFT), with a market capitalization nearly twice that of Oracle, also boasts an earnings per share of $2.76, over 60% higher than Oracle's $1.91. Microsoft also offers investors a current dividend of $0.80 per share, meaning a dividend yield of over 2.5%. Income investors comparing the two may lean a bit more towards Microsoft in this particular case.

Certainly, in any tech stock discussion, we must not leave out Google (NASDAQ:GOOG). Here, too, while dividends are not an issue, the company's investors could be rewarded in other ways with potential share growth. Google is running with a profit margin in excess of 25% and an estimated one year share price of over $720 (versus a recent price of just over $650 per). One drawback for some investors is the high per-share price. However, the recently announced stock split could help out a great deal with that.

It is hoped that Oracle won't go the way of one of its other competitors, IBM (NYSE:IBM). Although this once dominant giant still sports a market cap of over $237 billion, the company's share price is not expected to increase much at all over the next twelve months. And, with a dividend yield of only 1.5%, investors may not be willing to take a chance.

Overall, though, because of some of Oracle's competitors' recent successful offerings, investors have started dumping shares of Oracle on lesser-than-hoped-for new software licenses. Due to the sell-off, the stock has not fully recovered yet. That being said, all hope is not lost. Although many of these sellers' concerns were quite legitimate, the truth is that in the software industry, there is room for more than just one winner. That being said, Oracle is still extremely flush with excess cash — so this could still be a positive — especially for those investors who are seeking income via dividends.

In addition, because Oracle's numerous offerings of software and applications offer a wide variety of functions to users, large businesses and other entities are still buying up these offerings for any number of their day-to-day functions such as accounting, operations and finance. This does offer another bright spot for Oracle in terms of a recurring revenue stream that is due in large part from its hard-to-replace systems used by companies that need to continue gathering and reporting data. These systems have also afforded Oracle additional streams of revenue based on software updates, services, and consulting.

The Bottom Line

To be clear, the news is not all bad for shares of Oracle — it's simply not as exciting as it could be. With that in mind, I feel that investors who already own the stock should certainly hold on, as it can still offer a good value, as well as some amount of cash flow from its dividends. In terms of stocking up on more shares, though, I'm just not sure that the dollars would not be better spent elsewhere — especially if Oracle continues to ride its current recurring revenue wave without coming up with any new and improved offerings in the near future.

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