Oracle Bull's Pen
David Forrest
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What's not to love about Oracle at these prices? [Ed. note: This was written last week, with Oracle at around $25 per share.] The company reports one bad quarter and it gets slammed! For those not familiar with the events of the recent past, Oracle announced in early December that second quarter earnings fell short of expectations. The company reported earnings of $0.19 per share versus expectations of $0.23. Clearly not a great thing, but did the stock deserve to take a beating that would cut the darn thing almost in half? Of course not. Yet, that's what happened.
The Business -- Oracle Corp is the second-largest software company in the world, second only to Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>. Oracle logged over $5.6 billion in revenues last year and should top $7 billion this year. The company's core business is database management software. To understand how powerful a company Oracle is, and to really appreciate how vast its opportunities are in the future, consider this simple phrase: "Information is everything." What do I mean by that? Well, let's use some examples of "information" that everyone is familiar with:
...and the list goes on and on. Nearly every single piece of information out there needs to "go" somewhere. It has to be stored in some file on some computer, somewhere. Where does information, or "data," get stored? In a database. As the Internet grows, and as the need for corporations to keep even better track of customers grows, database management software will continue to be in very high demand. There's just no doubt about it.
Who has the absolute best database management software in the world? Oracle. I even believe that if we pinned Bill Gates down and forced him to say who makes the best database software, he'd say Oracle. Just a few days ago, InfoWorld announced that the Oracle8, the company's newest generation database software, is their Product of the Year. Across the board, all techies I talk to say that Oracle's products are incredible.
The beauty of being the leading database management company in the world is that you also have the luxury of servicing and creating special tools for all of your different customers. This service revenue continues to grow at a 30% clip each year and may even increase as the company ramps up its product offerings.
What about Microsoft? Microsoft is always to be feared, but from what my techie geek friends tell me, it isn't a real threat to Oracle's core business. The best database offering Microsoft has had to date is its SQL Server. This product has served small businesses well but, from what I'm told, just doesn't scale that well to handle very high volume transactions. When you're talking about Baby Bells and massive credit card companies, you're talking high volume. Big business needs incredibly robust solutions, and Oracle offers database solutions that Microsoft has been unable to offer so far.
Valuation? Oracle currently trades at approximately 3.5 times expected 1998 sales in a market where Microsoft trades at more than 14 times its expected sales. I'm not saying that Oracle is Microsoft, but I believe that it deserves a multiple closer to 5 times sales. This puts the company stock at around $35 a share, substantially higher than where it is today.
Wall Street punished Oracle for one bad quarter. Oracle has rewarded long-term investors over the last 10 years with more than 70 times their investment (if they held on that long). The company is the leader in database management software, a market that will continue to grow as long as there is data to capture and keep track of. I think it's prudent to look beyond our noses here, realize how strong this company really is, and not worry about the short term.
[Ed. note: On Thursday, Mar. 12, Oracle reported third quarter EPS of $0.22 versus $0.19 (excluding a charge) in last year's Q3. For more information on Oracle's Q3 results, check out our conference call synopsis.]
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