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Misunderstood Oracle May Pleasantly Surprise Investors

Stocks in this article: ORCL

In the previous four quarters, Oracle surprised on the upside three times. That's the kind of track record that one might expect from an industry leader that has numerous streams of recurring revenue. Let's look at a five-year chart to get a better picture of how the price has performed and what factors seem to determine the share price's direction. ORCL Chart ORCL data by YCharts

The trailing 12-month revenue-per-share line and year-over-year diluted quarterly EPS growth correlate well with the stock's price performance. If Oracle can't exceed the analyst community's estimated expectations concerning these two metrics, a price pullback wouldn't be surprising.

When Jim Cramer and Stephanie Link added Oracle to the Action Alerts Plus stable of holdings earlier in March, they wrote: "Oracle is the largest enterprise software company, with a 47% market share. It's twice the size of its next two competitors combined.

"It sells a wide range of enterprise products such as databases, middleware, applications and hardware. But it makes its money in higher-margin software license and services, which account for 70% of total revenue. The company has grown through acquisitions, the most recent one being Acme Packet. (We like that deal, as it provides more exposure to the networking and service-provider market.) It has made $40 billion worth of deals since fiscal 2005."

These factors are the main drivers for both revenue and EPS growth. The other key driver is the continuing upgrades and improvements its product-development teams continue to make on its existing product line. For example, one of the best-selling products is its PeopleSoft suite of applications.

On Monday, the company announced its latest version, PeopleSoft 9.2. To its credit, Oracle demonstrates its commitment to continue to invest in PeopleSoft by including more than 1,000 new features, functions and enhancements in PeopleSoft 9.2.

The details and benefits of this best-yet version can be found in the news release. Paco Aubrejuan, senior vice president and general manager of Oracle's PeopleSoft applications, summed up this app upgrade by writing: "With revolutionary innovations in user experience, Oracle's PeopleSoft 9.2 has new features and functionality designed to help users work more efficiently, get their work done quicker, and in a way that's more familiar based on consumer technologies. And, with dramatic improvements in operational cost management, we believe Oracle's PeopleSoft 9.2 is a game-changing release."

This may be one of the reasons that Oppenheimer reiterated its "outperform" rating for Oracle and raised its price target from $37 to $40. The analysts' consensus 1-year price target is slightly above $38 a share. I tend to agree with TheStreet Ratings' outlook for Oracle and am looking for a $40 price target and possibly a little higher.

We'll be listening for clues and future guidance from management on its 5 p.m. ET conference call on Wednesday. Overly cautious guidance going forward might precipitate a temporary share-price correction, and that, my friends, may offer an attractive entry point for those waiting for the price to come to them.

Disclosure: As of the time of publication, the author wasn't long shares of any of the companies mentioned in this article.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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