ballyhooing have reached a fevered pitch. And as with any sickness on Wall Street, that could mean opportunity for contrarians willing to go against the mass-market tide.
It's precisely because the future looks so bright for Microsoft and so bleak for Oracle that investors would do well to consider buying the laggard, while keeping the gains of the leader in perspective.
The contrast in the stories of the two companies over the last year couldn't be more stark.
Oracle, the database giant that was heir apparent to the position of software kingpin last year, has fallen off the mountain of hype that it built up in 2000 when it claimed it saved $1 billion using its own software. It's now dogged by increased competition in the database market and slow sales of its business software applications.
Microsoft, the software behemoth that was left for dead in 2000 after an antitrust ruling went against it and growth in its core PC market began drying up, has risen from the ashes with a litany of new products and initiatives. In April, it turned in an unexpectedly good fiscal third quarter in the face of Wall Street's skepticism.
The companies' stocks reflect their different lots. Oracle, which reached a high of $46.47 on Sept. 1, is now trading at $17.33, off its recent low of $14.45. Microsoft, meanwhile, has risen from its Dec. 21 low last year of $40.25, to zoom up into the $70s. On Thursday, it closed at $73.65.
But William Schaff, portfolio manager of the $68 million
Berger Information Technology fund, is selling and buying against the grain. He says he has been paring down his fund's 2% position in Microsoft, while adding to his 1% stake in Oracle.
"People are buying Microsoft right now, as if that's a smart thing to do," says Schaff. "If you're a trader, maybe it is. But if everyone does what they say you should do -- buy low and sell high -- then they ought to be doing the opposite of what they're doing right now." He notes that Microsoft is trading at 40 times its fiscal 2001 earnings right now, while its revenue is only projected to grow at 10%. Microsoft's fiscal year ends June 30.
On Oracle, he notes its recent troubles in selling software applications and the concerns many have about its just-completed fiscal fourth quarter. "But when the next big boost in e-commerce comes -- and there will be a next boost in e-commerce -- Oracle will be right there again." The company is currently trading at 39 times fiscal 2001 earnings, and its fiscal year ended May 31. Oracle's revenue, though, is projected to grow only 8% year over year.
Joseph Beaulieu, senior stock analyst at independent stock- and fund-rating firm
, has a similar take on the tale of these two stocks.
"Given where they're at right now, I'd probably buy Oracle before I'd buy Microsoft," Beaulieu says. "Microsoft is
now fairly valued. You've already gotten the bounce from people thinking the antitrust case is effectively over." Because of that, he says, there's more risk that the stock will get hurt from anything that comes out of the pending appeals-court decision on the case,
expected any day now. And, he notes that the company still has to execute on its .Net strategy, its new initiative to sell software as a service over the Internet.
"Oracle, on the other hand, this stock is extremely battered right now," Beaulieu says. He says he does have concerns about the company, especially the fact that CEO Larry Ellison has managed to drive away high-profile leaders Ray Lane and Gary Bloom in the past year. But if history is any judge, he says, Oracle will be back.
There's data, if only anecdotal, that backs up the take on the two companies. While pundits have made much over
and Microsoft edging in on Oracle's core database market, a recent survey of IT budgets by
Morgan Stanley Dean Witter
analyst Chuck Phillips found that 89% of respondents were not considering switching their database provider, with nearly 59% of respondents already using Oracle, compared with 32% who had Microsoft and 21% who had IBM (some reported having products from more than one company). That reluctance to switch databases came even as IBM aggressively priced its DB2 database to edge in on Oracle's turf.
Furthermore, the survey found that of technology spending areas most likely to be cut in a spending slowdown, upgrades for Microsoft's new Office software and Windows 2000 operating system were near the top of the list, in third and fifth places, respectively. Meanwhile, database spending came in second to last, or the 32nd spot, as an area likely to feel a budget cut.
Beaulieu acknowledges it's hard to buy a beaten-up stock, or to sell one that's soaring. But last year's story on this pair of software companies could become next year's tale all over again.
"I'm still kicking myself for not buying Microsoft when it was down in the 40s," Beaulieu says. "But things looked so grim. Their growth was slowing, they had problems, their near-term product pipeline didn't look too great, and the stock got crushed. But now, it's back at 70. I think you could be seeing the very same thing at Oracle now. I just can't see counting Oracle out."
Schaff understands why investors pile in, too.
"There's great comfort in going with the masses," Schaff says. "On the other hand, with a down company, everything looks like you're just heading into the abyss."
Have strength, contrarians.
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