Why Oracle Has 20% Upside

NEW YORK ( TheStreet) -- Oracle ( ORCL) CEO Larry Ellison is nothing if not brash. The company he leads could be as bright a star as he is, according to one analyst.

Canaccord Genuity analyst Richard Davis upgraded shares of the software giant to "buy" and raised his price target to $42 from $35. This was done ahead of Oracle's earnings, which are slated for next week. Davis cited the expected year-over-year increase in hardware revenue as one of the major reasons for the upgrade.

The other reason was the low valuation Oracle is being given in the market place, trading at just 11 times Davis' projected earnings for 2013.

"We believe the combination of these factors could lead to a 1 multiple point expansion, and when this is added to a projected 9-11% full year EPS growth with relatively easy comparisons in the May and August quarters, you could see ORCL advance 20% within a year," Davis said in a report.

Wall Street is bullish on Oracle's latest quarter. Analysts polled by Thomson Reuters are looking for Oracle to earn 66 cents a share on $9.39 billion in revenue. While revenue is only expected to grow 3.6% year over year, earnings will grow 6%, and any upside in hardware revenue could prove itself this quarter.

On the previous earnings call, Ellison suggested that the hardware business would turn around this quarter, showing growth and margin improvement. Oracle has worked hard to expand its hardware business over the past few years, acquiring Sun Microsystems, and its most recent acquisition, Acme Packet. If hardware turns the corner, that could boost Oracle's earnings multiple, Davis noted.

Software is another story as Oracle still generates a majority of its revenue from middleware and database software, and has increased its presence in cloud computing to fend off competitors. Oracle competes with the likes of IBM ( IBM), Workday ( WDAY), Salesforce.com ( CRM) in these categories. While some of these companies, particularly Salesforce and Workday, may experience stronger growth over the next decade, it's not likely to eat Oracle's lunch anytime soon.

As Oracle has become a more mature software company, it's had to make acquisitions to boost growth. As such, the company has traded with a discount to other software companies because of the complexity of some of the deals.

Oracle is likely to continue buying companies in the future, as Davis noted the company is projected to generate nearly $14 billion in operating cash flow this year. In the past, Oracle has bought a number of smaller companies in a particular space, not going after the leader. It's managed to effectively use this strategy by putting its strong sales force to work, selling assets that maybe aren't at the top of the sector.

With Ellison, 69, showing no signs of slowing down, Oracle seems poised to continue its ways of slow but steady growth.

-- Written by Chris Ciaccia in New York

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