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Oracle Still Looks Like a Smart Buy

Stocks in this article: ORCLSAPCRMCSCOVZJNPREMCIBM

NEW YORK ( TheStreet) -- Say what you want about the dormant nature of enterprise IT spending: Oracle (ORCL) certainly knows how to keep things interesting.

First, the database giant surprised the entire sector with its $2.1 billion acquisition of Acme Packet (APKT). Then, a little more than a month later, the company announced its intent to pick off network vendor Tekelec.

Although the Tekelec announcement didn't push the needle in terms of media attention, the move nonetheless demonstrates how serious Oracle is to differentiate itself from cloud rivals including Salesforce.com (CRM) and SAP (SAP). But perhaps more noteworthy is this deal signals the confidence of CEO Larry Ellison and Oracle's management team to go after telecom assets to combat (among others) Cisco (CSCO).

Given Tekelec's mobile traffic handling capabilities, Oracle now has ways to leverage Acme Packet's existing strengths in data control to service the needs of large telecom giants including Verizon (VZ). This was a space that was dominated by Cisco and Juniper Networks (JNPR). Not anymore.

However, this has not stopped the Street from harping on Oracle's third-quarter earnings disappointment, which immediately sent the stock tumbling down 8% in March. Management said then the miss was due to struggles with sales execution. The company had hired new salespeople in the preceding quarters, many of whom struggled to close deals, resulting in the 1% revenue decline.

It wasn't a good quarter, but Oracle's management didn't pretend it was, either. It's also worth noting here that the third quarter is historically Oracle's weakest. It certainly didn't help that the government cuts known as the sequester fell into that quarter. Investors, spooked by the results, sold off the stock fearing Oracle's near-term outlook despite margins remaining intact.

Investors also discounted that Exadata, Oracle's intelligent storage server solution, which rivals competing products from EMC (EMC) and IBM's (IBM) SmartCloud, was up 82% year over year. I don't expect there will be any type of slowdown in the fourth-quarter earnings announcement due out Thursday.

The Street is looking for a much improved performance. The consensus estimate is for earnings of 87 cents per share on revenue of $11.12 billion, which would represent revenue growth of just over 1%. These numbers seem very conservative to me, however. If my suspicions are correct that customers had postponed orders in the third quarter, I expect these orders will manifest themselves during this upcoming announcement.

I'm not suggesting this will be a slam-dunk quarter. But I don't anticipate Oracle will have similar issues with closing deals, given the recent positive results and upbeat guidance provided by Cisco.

With that in mind, I would be a buyer of Oracle shares ahead of the earnings report. I don't believe the current share price truly reflects Oracle's long-term value.

What's more, over the next five years the company should be able to produce high-single-digit revenue growth, while demonstrating improving free cash flow margins. I still see $40 as an achievable target by the end of the year.

At the time of publication, the author held no position in any of the stocks mentioned.

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

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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