Oracle Shares Gain on Winning Cloud Strategy

NEW YORK (TheStreet) -- Oracle (ORCL) shares were climbing Wednesday after the company revealed what analysts such as Cantor Fitzgerald's Brian White says is a "winning cloud strategy."

Shares were gaining 1.77% against the tech-heavy Nasdaq's flat to lower trading action for much of the day.

The company hosted cloud-focused events from both coasts of the U.S. on Tuesday. The Oracle Cloud Forum Meeting took place at the company's headquarters in Redwood Shores, Redwood City, Calif. The company also unveiled Oracle Solaris 11.2 in New York, which Oracle describes as the "complete, integrated and open platform" engineered for large-scale enterprise cloud environments. Solaris 11.2 combines OpenStack, SDN technology, clustering and virtualization with a proven enterprise-class OS, all in a single product, the company revealed.

John Fowler, Oracle's executive vice president of Systems told TheStreet on the sidelines of the Solaris 11.2 unveiling that Solaris 11.2 is an example of how Oracle is providing best-of-breed, differentiated cloud capabilities. The company wants to show the market that it stands apart from the numerous cloud services providers that have yet to turn a profit.

"There are people who are delivering cloud services which we also do," said Fowler. "But with Solaris, you get a very mature technology to deliver cloud services. And what most of the cloud companies have done is they've struggled with writing software and managing their systems -- that gives them high costs. So this is the opportunity for customers to get a very mature cloud delivery technology. And that's what we will use ourselves to deliver our cloud services. Technology like this -- lowers our cost."

During Oracle's last earnings report, the company showed over 60% growth in its cloud business, demonstrating that company does indeed "get" the cloud.

"We are a big, capable company, so we are delivering both on the product side as well as over in cloud services," Fowler continued. "People will see this announcement as a very serious commitment to delivering both product and cloud, and so it's very relevant."

White, who attended Oracle's Cloud Forum Meeting, said he's confident of further margin expansion from Oracle as the company continues to ramp the roughly $1 billion business at the Engineered Systems part of the hardware division and jumps into the higher-margin buckets of the cloud industry.

"They're saying, 'OK, fine,'" the managing director and global head of technology hardware and software at Cantor said to TheStreet. "'Yeah we'll match them [the components of the pricing wars in IaaS], but that isn't the core of what we're doing though.'"

Although Oracle previously indicated that it will match the aggressive pricing from competitors in certain parts of the IaaS cloud layer, the company made it very clear during the Cloud Forum that it is focused on offering high value-added offerings related to software and is not interested in just running data centers.

White says that Oracle is offering a broad platform of cloud services that include SaaS, PaaS, and IaaS, and the company is doing an excellent job of integrating its products.

Oracle also emphasized during the event the importance of engineering operational aspects of managing software into its software solutions, which greatly reduces operating costs. Also making an impression on White was that Oracle continued to show that its SaaS products are developed for optimal efficiency when running on the company's Engineered Systems.

Regarding applications in the cloud, Oracle indicated that customers have spent the past few years purchasing disparate SaaS products from multiple vendors but are starting to look to consolidate these offerings to gain efficiencies. White said that Oracle has the tremendous opportunity to make a big impact on the SaaS market with this trend, given that it already has a broad SaaS offering and is planning to be one of the major product consolidators.

The timing of Oracle's cloud event couldn't have come at a better time for Oracle, as the market appears to be shying away from the richly valued cloud companies that struggle with profitability, while high-quality, traditional tech stocks such as Oracle remain undervalued.

"As people get that Oracle gets the cloud and that it has the product to support the growth areas, people are going to give it a better valuation we believe. That's the theme behind the cloud in Oracle," White said.

The analyst has a "buy" rating on Oracle with $50 price target based on nearly 15x his 2015 calendar-year pro forma EPS estimate. This multiple is in line with the S&P 500 Index and is slightly above Oracle's 13x average since 2007.

Oracle has expanded its operating margin to 47.3% in fiscal year 2013 from 30.4% in fiscal year 2000. In the fourth quarter of fiscal 2013, Oracle's operating margin reached 50.8%, which is the second-highest print for Oracle that Cantor analysts have on record. As such, Oracle enjoys the highest operating margin profile of any company in the Cantor tech hardware and software team's coverage universe, while also sitting well above other leading software vendors such as Microsoft (MSFT) and SAP (SAP).

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-- Written by Andrea Tse in New York

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