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This Software Giant Is Worth A Second Look

Chris Lau, Kapitall: Earnings and a weak guidance were to blame when Oracle (ORCL) showed up on the list of top biggest percentage losers since the previous close. The list contained companies whose return averaged 31% and had a forward P/E of 23. Given the solid returns for the companies despite a recent drop, does this mean Oracle is a company to consider buying?

[More from Kapitall:  Is Netflix Disrupting Traditional Television?​]

Oracle earned $0.80 per share in the quarter. It grew licensing and product support sales by 6%, but investors were worried because new license growth was only 1%. Hardware product sales dropped by 13%, but improved from the 23% decline in the previous quarter. Engineered system sales grew by 45%, and now account for one-third of hardware sales.

The company now generates $1 billion a year (annualized) in sales for its cloud business, helped by the 505 growth in cloud app sales for the ERP, HR, and CRM markets. The company also doubled its dividend to $0.12 and authorized its share buyback to $12 billion of common stock.

Oracle forecast sales would grow between 2%-5%, compared to a 4.5% consensus estimate. Earnings are expected to be $0.56 – $0.59 per share, compared to the $0.58 per share consensus estimate. Oracle believes it will be able to grow sales in cloud subscription and in the hardware division.

Comparison

Oracle is comparable to  Microsoft (MSFT) but larger than SAP (SAP) in market cap, but has one of the lowest forward P/Es:

Ellison, Oracle’s CEO, noted that size of SAP and Workday combined are smaller when compared using the $1 billion cloud business run rate. SAP retorted by pointing out its growth in software and cloud revenues grew by 21%, compared to the 4% growth for Oracle.

Oracle and Microsoft are set to announce a partnership.

Price of Profit Comparison

Conclusion

Challenges in the European and Asian markets contributed to a disappointing quarter for Oracle, but the company is looking to partner with rivals for its new database to grow. Dubbed the “12C” database, where c denotes “cloud,” the system will allow customers to hold separate databases that share the underlying hardware. In an age where virtualization is growing, Oracle will need to offer licensing-friendly options for enterprise customers. As the customer base grows, so will its share price.

Written by Chris Lau, Kapitall Contributor

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