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Vinay Singh
Vinay Singh
Articles (229) 

Here's Why Buying Oracle on the Pullback Makes Sense

June 27, 2014 | About:

In 2008, Oracle’s (NYSE:ORCL) CEO, Lawrence Ellison, called cloud computing a “nonsensical" concept, and had absolutely no strategy for maneuvering the company in that direction. Five years hence, cloud computing has become an indispensable tool for huge companies seeking a sophisticated IT support system.

Competitors Are Taking Oracle’s Share of the Pie

Additionally, investors in Oracle have recently become conscious of its growing competition. As this article points out, Oracle’s revenue growth is quite petty when compared to high growth achieved by its major rivals. Workday’s revenue grew 61% year-over-year to $91.6 million with major contribution from subscriptions for its cloud applications.

Oracle claimed in its earnings call that its cloud business was growing at a faster pace than Workday, which is a relatively smaller player in terms of resources and customer base. However, it is a fact that Workday has shown phenomenal growth in subscriptions for its cloud business. Besides strong business fundamentals, it has a maintained healthy operating margins and adequate cash on its balance sheet.

One of Oracle’s arch-rivals, SAP (SAP), has been experimenting with various cloud strategies and trying to incorporate a business suite to the cloud of late. In its recent results, it announced growth of 25% in software and cloud subscription revenue. Its revolutionary HANA platform has been driving excellent growth in the past few quarters. In the first quarter, HANA tripled its revenue as compared to same period last year, that testified to its potential to make it big in the industry. Oracle’s weaker than expected results negatively affected SAP’s share price as investors grew apprehensive on the industry's prospects.

Partnering with Salesforce.com

Oracle’s CEO Larry Ellison announced an alliance with Salesforce.com (CRM) last year in order to strengthen its foothold in the cloud computing sphere and said that it would be a partner in the company’s latest 12c technology. The company was in the news recently for its acquisition of ExactTarget, which provides marketing solutions in the form of SaaS, for a whopping $2.5 billion. There has been no monetary ascertainment of the value this deal will bring to Salesforce, but it will surely provide adequate leverage to the company in providing marketing solutions in the form of SaaS.

From Different Angles

Oracle is currently working on new business propositions, including the cloud, that are going to rattle its CEO’s previous line of thought. The issue with the company is that there is no simple input-output relationship, making it difficult to analyze the stock with defined methods or metrics. I have outlined a few points that investors need to look out for:

A major part of Oracle’s earnings call was focused on software which camouflaged the poor performance of its hardware business. Its hardware system product revenue declined 23% year over year. The future still looks bleak with regard to hardware revenue, which, as per management, is expected to grow anywhere between negative 6% and 2% in the next quarter

As mentioned on the earnings call, Oracle has partnered with industry leaders Microsoft and Salesforce.com in order to reshape its cloud computing applications. This combined effort should have positive implications for Oracle’s cloud business besides the presence of its much talked-about 12c technology.

The decline in share price after the earnings call has made it a reasonable buy when compared to its peers. At a forward P/E of around 9, Oracle is cheaper than rivals like Salesforce.com

Is It the Time to Buy?

While the wheels are turning at Oracle, management has given out big gifts like a doubled dividend and massive buyback to its shareholders for remaining patient and optimistic. The time is ripe to invest in the company because it has massive opportunities in the future and is reasonably cheap.

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