NEW YORK (TheStreet) -- With rumors surfacing Tuesday Larry Ellison was moving in on a possible $5 billion bid for point-of-sale technology company Micro Systems (MCRS) , Oracle's (ORCL) - Get Oracle Corporation Report CEO is showing he means business and won't be left behind in the race to the cloud.
The enterprise software giant will report financial results for its fiscal fourth-quarter on Thursday. Its shares closed Tuesday at $42.32, up nearly 11% for the year to date.
Some think Oracle has fallen behind cloud giants Salesforce.com (CRM) - Get salesforce.com, inc. Report and Workday (WDAY) - Get Workday, Inc. Class A Report but Ellison is trying to end these debates. I don't think Ellison's done yet, even if he lands Micro Systems.
After having traded in a tight range since the beginning of the year, Oracle shares have broken out. But it's about where Oracle is heading that matters, and that's where value in the shares can still be found.
With recent acquisitions like cloud-marketing specialist Responsys (MKTG) and cloud marketing technology specialist BlueKai, Ellison is flexing his financial muscle while affirming how seriously he's taking the cloud.
If you combine Oracle's aggressiveness with recent data from Forrester Research, which suggests the market for digital marketing will grow to over $43 billion in the next two years, you get shares that should command a price tag of $50 in the next 12 months. This assumes Oracle is able to integrate these buys into the company's strategy. I see no signs suggesting otherwise.
Ellison has been clear about the direction he wants to take Oracle. The company is transitioning the business to stronger growth areas. In the most recent quarter Oracle's cloud software revenue was up 25% year over year.
Equally impressive, Oracle's Engineered Systems segment is growing at a faster rate than management expected. This is important to note because the engineered systems, which is the hardware, can be integrated to support Oracle's cloud applications. This means customers are looking to Oracle to provide a complete workable solution from the standpoint of both hardware and software.
On Thursday, the Street will be looking for 95 cents in earnings per share on revenue of $11.48 billion, which represents year-over-year earnings and revenue growth of 9% and 5%, respectively. For a company of Oracle's size, these would be solid results.
But for these shares to continue their uptrend management has to convince investors Oracle's enterprise position is sustainable while companies embrace on-demand services like software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS). These are areas that IBM (IBM) - Get International Business Machines Corporation Report and Microsoft (MSFT) - Get Microsoft Corporation Reporthave begun to attack.
Secondly, management must address new ways to mitigate lower-cost services from Salesforce and Workday and other open source alternatives. Last but not least, rivals like Red Hat (RHT) - Get Red Hat, Inc. Report and to a lesser extent Citrix (CTXS) - Get Citrix Systems, Inc. Report have made inroads in areas like middleware, which is the software that lies between an operating system and specific software applications.
Although Oracle still has advantages in both middleware and database markets, Oracle's name is no longer enough to win over customers. Enterprises are looking for differentiation. If Oracle can address these three areas, the stock should do well in the long term.
The bottom line is Ellison, who has executed a well-thought-out plan to turn Oracle into a cloud power, is much smarter than initially perceived. Investors would be wise not to bet against him.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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