Earnings Preview: Can Oracle Beat the Great Cloud Squeeze?

NEW YORK ( TheStreet) -- Oracle ( ORCL) will announce earnings next Wednesday and analysts are expecting big things, possibly a substantial beat on the consensus earnings estimate of 66 cents/share.

There are two reasons for this. One is a belief that companies have finally loosened the corporate purse strings and would rather buy technology than hire new people.

The other is a misunderstanding of cloud.

As Chris Ciaccia wrote Wednesday, Canaccord Genuity analyst Richard Davis has raised his rating on the stock to a buy with a $42/share target. The stock closed at $35.58/share on Wednesday. Davis said that the below-market PE multiple of 11 was unjustified, and that combined with an advance of about 10% on earnings would lead to a 20% rise in the stock.

That's simple math. If you have a track record of beating on the number and growth in the sector looks strong, you'd expect a little acceleration in the multiple investors pay for earnings.

But another reason for optimism, as Michael Hickins of The Wall Street Journal "CIO" blog wrote, is growing acceptance of "cloud," or at least Oracle's view of cloud.

Oracle doubled down on that view Wednesday, acquiring privately held Nimbula, a provider of private cloud operating systems launched by Amazon.com ( AMZN) veterans, for an undisclosed price.

Redmonk co-founder James Governor tweeted after the announcement that "the eye of Sauron turns upon OpenStack," the open source cloud infrastructure Nimbula had been supporting. He added that Oracle is responding here to IBM ( IBM) and its cloud moves, not trying to take over the open source software IBM now supports.

While cloud technology is designed to lead to lower costs, using commodity hardware and open software, Oracle's cloud is quite different, being based exclusively on its own hardware and applications. The joke is it's a sort of "get off my lawn" cloud.

Cloud advocates build systems from an infrastructure, then create a platform for writing applications and finally deliver software services. That's how most cloud stacks work. Oracle's cloud works the other way, with software -- specifically Oracle database applications -- as central, and the rest of the stack completely controlled by the vendor.

This is convenient for CIOs who have made their operations dependent on Oracle's databases, and the applications arising from them. They can tell their bosses they bought cloud, while maintaining dependence on the same vendor they've used for years. Given the complexity of database applications, and corporate dependence on them, Oracle has a unique opportunity to maintain this customer lock-in, even while paying lip service to cloud ideals.

Oracle CEO Larry Ellison's biggest gamble to date was the purchase of Sun Microsystems in 2010, and while he was unable to monetize most of its open-source software assets, he has been able to tie its hardware, including network storage devices, closely to Oracle software, selling them profitably as a package.

With the passing of Steve Jobs and the retirement of Bill Gates, Ellison is the last of the 1980's swashbuckling tech CEOs, and he recently bought an airline that serves his private island in Hawaii, The Inquirer reported. Unlike his contemporaries, Ellison has also cleared up questions of succession, naming former Hewlett-Packard ( HPQ) CEO Mark Hurd as "co-president" in 2010.

This is the kind of stability analysts like, a company that is growing at a good clip, that understands where the future lies and has everything buttoned up tight.

But, as I say, that's not cloud. As I noted, cloud produces ruthless price competition and a serious profit squeeze. It's all about standards, about commodity pricing, about everything Oracle is not, especially with what Oracle calls cloud.

How long can Oracle maintain its cloud doubletalk and keep earnings growing in the face of real cloud's savings? We'll get a clue next week.

At the time of publication, the author was long IBM.

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

If you liked this article you might like

HPE's Earnings Beat Is Encouraging, but Don't Get Too Excited Just Yet

HPE's Earnings Beat Is Encouraging, but Don't Get Too Excited Just Yet

Social Media Rebound Revives IPO Notion for Pinterest; Volatility and M&A--ICYMI

Social Media Rebound Revives IPO Notion for Pinterest; Volatility and M&A--ICYMI

3 Software Firms That Look Especially Attractive Now as Takeover Candidates

3 Software Firms That Look Especially Attractive Now as Takeover Candidates

Tech Giants Amazon, Microsoft, Google and IBM Keep Their Heads in the Cloud

Tech Giants Amazon, Microsoft, Google and IBM Keep Their Heads in the Cloud

9 Tech Stocks That Got Hit the Hardest on Friday's Selloff

9 Tech Stocks That Got Hit the Hardest on Friday's Selloff