Oracle Bear's Rebuttal
Jim Surowiecki ([email protected])

You'll get no argument from me that Oracle has been a great company in the past, and if you were smart enough -- or lucky enough -- to buy stock in the company four or five years ago, you have been well-rewarded. However, the question investors have to ask themselves today is not whether Oracle has done right by stockholders in the past, but whether it will do right by them in the future. And here I think David's case is basically unconvincing, both in terms of Oracle's core business prospects and, even more importantly, in terms of its valuation.

In terms of the core business, information is certainly important today and obviously will be more important tomorrow (though saying that "information is everything" is the kind of exaggeration that has led people to lose huge amounts of money in companies whose only asset was a tiny foothold on this imaginary information superhighway). But the fact that data needs to be stored and that the amount of data that needs to be stored is growing does not necessarily mean that database management as a business is on a steep growth curve for one very good reason -- a database management program that works well today is likely to continue to work well two or three years from now. And businesses, more even than consumers, tend to be what the industry calls "early adopters," which is to say that they get the software they need when they need it, instead of waiting.

Remember that, even in a growing economy, analysts and even some industry execs have been talking about saturation in the database management market. And remember also that every company in the industry, including Informix and Sybase, have been having problems growing earnings. Oracle8 is a great product. But is it so much greater than the previous iteration that businesses are going to toss over their existing software in favor of it? And will Oracle9 be qualitatively better enough to justify getting rid of Oracle8?

The point is not, as I said before, that Oracle is suddenly going to start losing money, but investing in Oracle means not investing in some other company that has a real chance of growing earnings substantially over the next five years.

And that brings us to the question of valuation. David, for some reason, values Oracle based on its sales, saying that it deserves to be valued at 5x sales. But by that random standard, General Motors should have a market cap of $750 billion. You can't value Oracle, which is a well-established company, on its sales. You have to value it on its earnings growth. In the simplest terms, its current P/E should be equal to its projected percentage growth in earnings for the next half-decade. Oracle's P/E is around 36. Does anyone really think that 35% growth is feasible for a company that has seen earnings rise at a sequentially slower rate in each of the last three quarters?

Oracle wasn't just slammed for one weak quarter. The first quarter was also an unimpressive performance, with Oracle just squeaking past estimates instead of trouncing them as it had in the past. Larry Ellison's fortune is not, to be sure, in jeopardy. But neither the network computer nor database management are the wave of the future, either. I think David said it best when he said that Oracle is no Microsoft.

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