Oracle Selloff Is a Long-Term Buy Opportunity

NEW YORK (TheStreet) -- Shares of database giant Oracle (ORCL) are trading down close to 3% Wednesday on disappointing fiscal third-quarter earnings results.

Oracle's stock, which has traded in a tight range since the beginning of the year, continues to be a source of frustration for investors. The stock closed 2013 at $38.14. On the year-to-date, shares are down 1.25% to $37.66 as of this writing.

The story has been Oracle's lack of revenue growth. Worse, Oracle is perceived unresponsive to the likes of Salesforce.com (CRM) and Workday (WDAY). These rivals have ushered in a new generation of cloud-based business applications software that's killing off customers' need for services that brought Oracle to prominence.


WATCH: Oracle Presents Trading Opportunity on Earnings Dip

Although Oracle continues to make headway in enterprise software and cloud-based services, growth has not come in sufficient quantities. And Tuesday's results, which delivered third-quarter revenue of $9.3 billion, were no different. Although revenue was up 4% year over year, it missed analysts' estimates of $9.36 billion.

Oracle showed moderate strength in new software licenses and cloud software subscriptions. That business posted revenue of $2.4 billion, which was up 4% year over year. But that wasn't enough to please analysts.

Given the improved IT spending environment, analysts like Daniel Ives of FBR Capital Markets were looking for stronger numbers. Ives expected the cloud/subscription segment to post growth of 7%.

Ives has been extremely critical of Oracle and noted that the company is struggling with internal execution issues. Although Ives credited Oracle as having shown "some improvement," he insists, "they still have a bit of an uphill battle as they try to turn the ship around."

But with respect to Ives, Oracle's results weren't all bad. The company posted 5% increase in software license updates and product support revenues, which totaled $4.6 billion.

What's more, CEO Larry Ellison has been clear about shifting Oracle's focus to newer parts of the company that are seeing stronger growth. Despite the earnings miss, that Oracle's cloud software sales were up 25% is an encouraging sign. And the 7% growth in Oracle's beleaguered hardware unit was no small accomplishment.

Ellison also reminded analysts that the company was deep in the process of hiring specialist sales teams for Oracle's new cloud-based services. These are believed to have the best growth potential.

From an operations perspective, GAAP earnings per share were up 8% to 56 cents per share, while non-GAAP earnings per share were up 5% to 68 cents per share. Operating cash flow on a trailing 12-month basis was up 10% to $15 billion. So although Oracle's revenue may appear unimpressive, management continues to deliver on the bottom line.

In terms of guidance, management forecasts earnings (excluding items) to be in the range of 92 cents to 99 cents per share. Meanwhile, fourth-quarter revenue is projected to post year-over-year improvement of 3% to 7%. Analysts had modeled earnings of 95 cents and revenue of $11.5 billion, which suggests 5% growth.

Of note, these projections don't factor in Oracle's growth potential from its recent acquisitions of Responsys (MKTG) and cloud marketing technology specialist BlueKai.

Research firm Forrester predicts the market for digital marketing will grow to more than $43 billion in the next two years. Oracle is well positioned to capitalize on this growth. Plus, at 12 times forward earnings, Oracle stock still looks cheap, especially considering that the shares are now trading at year-ago levels.

So from my vantage point; with cloud momentum on its side, Oracle will benefit from easier comparisons in coming quarters. And investors would do a disservice to themselves to bet against Oracle and ignore a strong buying opportunity.

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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