Tuesday, July 9, 2013

Is Oracle Just Another Cash Cow?

From The Motley Fool
By Sarfaraz A. Khan
Research Assistant: G. Yousuf

Includes Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT) and Salesforce.com (NYSE:CRM)
A week ago, Oracle (NASDAQ: ORCL) reported quarterly results that missed analysts’ estimates by a small margin. The shareholders reacted negatively, and the company's shares dropped by 9.3% the following day. To help, the company has announced cloud computing deals with some of its biggest rivals. 
The computer hardware and software company’s sales remained largely flat, showing an increase of just 0.3% from the same quarter last year to $10.95 billion, which were below analysts’ estimates of $11.12 billion. Oracles sales improved by just 2.4% in
the Americas region, remained flat in Europe, Middle East & Africa (EMEA) and performed poorly in Asia Pacific, particularly China and Australia. Investors have been concerned regarding the slowdown in the company’s growth, and the current results have done little to allay those fears. On the other hand, the company's adjusted earnings of $0.87 per share, a year-over-year increase of 5%, were in line with estimates.

% Change
$ 5,771Mn
$ 5,911Mn
 $ 3,314Mn
 $ 3,328 Mn
Asia Pacific
$ 1,831Mn
 $ 1,708 Mn
Oracle has also increased its quarterly dividend by 100% to $0.12 per share. While a step in the right direction, I believe that this won’t be able to lure investors as the stock still gives a yield of just 1.59% and is considerably below the 2.68% offered by its rival Microsoft (NASDAQ:MSFT).
Microsoft has made significant progress in its non-PC operations, particularly in cloud computing. It could become a better organization by making necessary changes on the management front with its current restructuring. Due to the weakness in PC market, however, I don’t consider Microsoft as an attractive investment option at this time.
Sluggish growth
Since the beginning of the calendar year 2012, the best growth figures Oracle could manage was just 3.43% for the three months ending Nov. 2012; this is significantly below the growth witnessed by some of its rivals such as Microsoft or Salesforce.com (NYSE: CRM) in the same period. The world has embraced cloud computing, leaving Oracle behind. The company is now playing catch up with the enterprise software-as-a-service (SaaS) market by forming partnerships with its rivals, which I believe are essential for Oracle’s both long and short-term survival.
There was some good news for Oracle’s investors, however. The company has a $12 billion share buyback program and it will also be moving to NYSE from NASDAQ in a few days. I believe this is a positive since NYSE is considered the home of the more internationally-focused blue-chip stocks. Without giving any specific reasons, Oracle’s management has said that the move is “in the best interests of its stockholders, customers and partners" and I am inclined to believe that. 
Cloud deals: Who wins?
Following its earnings release, Microsoft (the maker of SQL Server) and Oracle (the maker of the new public cloud services focused 12c database) officially announced an enterprise partnership. The 12c is SQL’s biggest competitor. According to the terms of the deal, two of Microsoft’s biggest corporate computer networking services, Windows Server Hyper-V virtualization software and Windows Azure, will support some of Oracle’s key software. I believe that the deal not only works well for Oracle, but is a big win for Microsoft as well. With Oracle on board, Microsoft’s services will become more attractive for customers, especially since its bigger and smaller open-source rivals have been giving it a tough time.
Oracle has also inked a similar nine-year cloud computing partnership with its bitter rival Salesforce.com in which the two firms will integrate their clouds. Oracle has emerged on top with this deal as Salesforce.com will buy Oracle’s hardware and software for nine years. Additionally, Salesforce.com has repeatedly played down Oracle’s cloud computing technology in the past,calling it “false cloud;” with the new deal, however, it appears that Salesforce.com has not only given its approval to Oracle’s technology but has also embraced it. However, I believe that through this deal, Salesforce.com can increase its customer base. Due to the integration of the services of Oracle and Salesforce.com, the latter’s products will become easily accessible to former’s customers and potential customers. Nonetheless, while we are hoping for the best for Salesforce.com, the deal is a sure-fire win only for Oracle.
 My foolish take
I believe that the current deals have come out of necessity as the changing business environment has forced Oracle to embrace cloud computing, something that Oracle CEO Larry Elison called “nonsensical” just a few years ago.
With the current dip in its price, Oracle is a good value play. It is now cheaper than Microsoft, trading at 10.5 times the current year and 9.6 times next year’s profit estimates. It also generates a healthy return on equity of 24.5%. With sluggish growth, little dividend and intense competition, however, Oracle is just another cash cow -- i.e it is not for those who are looking to invest for the long haul in a company with high growth prospects.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours of this publication. I wrote this article myself, and it expresses my own personal opinion. I have no business relationship with any company whose stock is mentioned in this article.