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It's time to buy a beefed-up Oracle
Larry Ellison's risky acquisition spree is starting to pay off. Expect the stock to soar as investors start to notice.
By Robert Walberg
Bigger really is better. At least thats the impression I get from Oracles third quarter numbers, in which the company's net income jumped 42%.
Oracle (ORCL, news, msgs) beat the Street's per-share estimate by a penny and sales were up 18%, to $3.47 billion, and management noted that without a strengthening, sales for the period would have been up closer to 22%.
It was the best quarter for Oracle since it invested nearly $20 billion to acquire PeopleSoft, Retek and Siebel Systems. The stated for those acquisitions, made over the past year, was to get bigger in an attempt to more successfully compete with SAP AG (SAP, news, msgs).
While many on Wall Street feared that so many takeovers would prove distracting to management and confusing to clients, the numbers suggest that Larry Ellisons master plan is playing out successfully. This is probably best seen in the 16% jump in the sale of new software licenses, an improvement of four percentage points over last years growth rate.
Fueling the gain was a 77% year-over-year rise in new applications licenses. It should be noted that the year-ago figures include only two months of PeopleSoft revenues and nothing from Siebel Systems, so its not an apples-to-apples comparison. Even so, the Street was looking for sales of $234 million, and the company delivered $269 million.
Oracle did stumble a bit in the sale of new database and middleware licenses. The company saw revenues from this segment jump 4% year-over-year to $827 million. That was well shy of the Street estimate of $850 million. It is this shortfall that explains why the stock shed 53 cents, or 3.9%, in after-hours trading. Don't be alarmed -- on a constant-currency basis, Oracles sale of new database licenses grew by 8%.
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The recent acquisitions were centered on growing the companys share of the fast-growing applications business. On that front, Oracle did better than expected. Especially encouraging was the growth in Europe -- SAPs home turf -- where applications revenue jumped by 118% to $96 million. In the Americas, sales were up by 63%.
As investors grow more comfortable with the new, bigger Oracle, look for the share price to finally start accelerating. Uncertainties over the acquisition strategy have kept the stock confined to a tight range, ($12 to $14) for most of the last year. By comparison, SAPs stock is up roughly 35%.
Disappointment over the growth in database sales is apt to deflate the stock over the next few days, but long-term investors will want to take advantage of any such weakness to buy. Oracle is doing a very good job of executing on Ellisons vision of a bigger, more complete competitor to SAP. Sooner or later, the market will take notice, and the valuation gap between the software giants will begin to narrow.
Despite its renewed growth, improved margins, strong cash flow and committed management team, Oracle ended Mondays session trading at 17.6 times this year's estimated earnings of 78 cents, and 15.1 times next years projected earnings of 98 cents. SAP, which is growing revenues about out 10% a year, is trading at 29.3 times and 24.5 times projected results. If Oracles multiple climbs to a mere 20 times, the stock could climb to $20 over the next 12 to 18 months.
A move to this range would represent a gain of roughly 40%, a nice reward for shareholders and management.
Oracle remains a Street Patrol portfolio holding.
I would also like to take this opportunity to add Garmin (GRMN, news, msgs) to my portfolio. The stock of this leading GPS maker set a new 52-week high in yesterdays trading. My target is $100 per share over the next 6-12 months.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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