NEW YORK (TheStreet) -- With better-than-expected earnings results from multimedia and cloud software company Adobe Systems (ADBE) , Wall Street is warming to database software giant Oracle (ORCL) , which reports fiscal second-quarter earnings results Wednesday.

On Monday, analyst Keith Weiss of Morgan Stanley raised his rating on Oracle shares to overweight from equal weight, while setting a 12-month price target of $50.

He cited Oracle's prospects in cloud computing and suggested that the company's shares can command the same valuation multiple that Microsoft (MSFT) shares have enjoyed during the past two years.

In a research report about Oracle's core business and other growth drivers for the stock, Weiss wrote, "We see a 5% to 7% operating income growth (driven largely from the maintenance base), plus a 3% to 5% reduction in diluted share count, plus a 100 to 150 [basis point] dividend yield driving a 10% to 12% total return profile for ORCL over the next two years, at least in line with the S&P 500."

His comparison to the S&P 500 is interesting.

Although Oracle shares are trading at about $41.11, with a gain of 2.9% Monday, Oracle shares are up 7.45% year to date, compared with the S&P 500's 7.64% gain. The problem, however, is that Oracle's story is one of underperformance, when compared with gains of 21.98% and 24.75% by Adobe and Microsoft, respectively.

Can Oracle's performance improve next year?

Weiss says it can.

His $50 target suggests additional gains of 21.6%. And if Weiss is correct in suggesting that Oracle's price-to-earnings ratio of 17.18 can follow Microsoft, with a P/E of 18.29, there are at least 25% gains to be had in the next 12 to 18 months.

Part of his argument stems from the low expectations he says that the market has for Oracle's business.

That  is due in part to Oracle's recent lack of revenue growth, which has fallen behind on-demand cloud software companies such as Salesforce.com (CRM) and Workday (WDAY) .

In its most recent quarter, Oracle's revenue was $8.6 billion, up 3% from a year earlier, missing consensus estimates of $8.77 billion. And this was lower than Oracle's own guidance of 4% to 6% year-over-year growth.

Still, Oracle's Engineered Systems segment, which has grown at a faster rate than management expected, gives it an advantage that Salesforce.com doesn't have. This is the hardware part of the business that Oracle can integrate to support its cloud applications, meaning that customers who are looking for a complete workable solution from both hardware and software have to consider the company over its rivals.

Plus, with recent acquisitions of cloud marketing technology specialist BlueKai and cloud marketing specialist Responsys (MKTG) , Oracle continues to bridge the gap that exists between it and software-as-a-service leader Salesforce.

To that end, more important than what Oracle reports Wednesday is how convincing the company is about its cloud prospects and the degree to which it can increase share in markets such as SaaS and infrastructure as a service, two fast-growing areas that have caught the attention of rivals IBM (IBM) and Microsoft.

Oracle would also need to guide with the level of confidence that suggests that the company believes in itself.

For now, with the stock trading at just 13.5 times forward estimates of $3.04, compared with the average forward P/E of 17 of the companies in the S&P 500, according to The Wall Street Journal, Oracle is one of the best bargains on the market.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates ORACLE CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate ORACLE CORP (ORCL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, revenue growth, reasonable valuation levels, expanding profit margins and growth in earnings per share. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: ORCL Ratings Report

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