When the debt crisis in Europe hampered business there in the final weeks of May, Oracle (ORCL), like most of the leading companies in Wall Street, had its back against the wall. But it is has recovered since then, its stock rising the most in more than four months after fiscal fourth quarter profit topped the estimates of analysts, buoyed by sales of new software licenses.
Oracle reported fourth quarter results that showed earnings excluding certain costs were $4.6 billion, or 82 cents a share, beating the 79 cents average estimate, according to data complied by Bloomberg. Revenue increased by 3% to $10.9 billion, or 62 cents, a year earlier. Revenue from new database licenses, which accounted for two-thirds of Oracle license sales, was unchanged in the fourth quarter.
I believe Oracle will experience earnings growth both in 2013 and over the next few years, due to several reasons. First, it is selling more licenses of its business applications that companies install on their machines. License sales are important because they lead to future revenue streams from contracts customers sign to support their software. Second, the company will benefit from the sales of cloud computing applications for human resource and customer management. Increasingly, businesses prefer accessing information on the internet instead of installing them on internal servers. And finally, Oracle has increased research and development funds by 14%, a solid investment for a technology company.
Oracle plans to continue being a dominant player in the database software sector. As it has done in the past, it plans to create related products and offer them to companies to bundle them within their data management software. Since almost all of these companies do business with Oracle and need all sorts of database software, they will accept Oracle's solutions. Oracle will continue to offer products that can be used across platforms, so sales can be expected to grow more than the ones for Microsoft and IBM, both of whom only build software that is compatible with their own products. Oracle fills the market with software that can be used on computers not using Windows as an operating a system and not built by IBM.
Oracle was one of billionaire Ken Fisher's favorite stocks, as his Fisher Asset Management reported a position of 20 million shares at the end of the fourth quarter. Seth Klarman's Baupost Group initiated a position of nearly 16 million shares in Oracle between April and June. Oracle's stock price is up 20% since the beginning of the year. Oracle has a market capitalization of about $150 billion and a share price of $32. Its current price-to earnings ratio is 15.69, compared to 14.15, 15.98, 23.12, and 22.63 for IBM, Microsoft, SAP, and the industry average respectively. Its price-to-sales ratio is 4.11, competitive to 2.13, 3,43, 4.33, and 2.99 for IBM, Microsoft, SAP, and the sector average respectively. Looking forward, I believe that Oracle will continue outpacing the growth in the overall industry, primarily due to cloud computing being elevated to a new level of importance in the economy. Assuming Oracle finishes disposing the less expensive servers and storage computers it gained in its Sun acquisition from its line-up, sales of computer hardware and technical support services will increase.
The company is looking for growth as the year comes to a close. According to its fourth quarter report, it won three cloud computing deals against competition from Workday during the period ending in May. It also sold a high-end hardware system to Facebook. New software license sales will range from unchanged from a year to a 10% increase, says Safra Catz, Oracle's Chief Financial Officer. But this is not to suggest Oracle doesn't have challenges.
German software maker SAP intends to become a major provider of database software, intensifying its rivalry with Oracle. Having acquired Sybase, the world's number 4 maker of database software in July 2010, SAP has been focused on expanding Sybase's line of mobility software, becoming more aggressive in the database business in the process. SAP has sold a specialized database dubbed Hana that pulled in $208 million in sales in its first two quarters in the market, and it plans to make it available as a database for business management applications by the end of the year.
Oracle is also experiencing some difficulty in the sale of hardware systems. The fourth quarter report showed that sales fell in the sector by 14%. However, an impressive cost-cutting program and rise in the sale of software offset the loss.
Despite the problems, I expect Oracle to perform well in the tough business environment. Though SAP is becoming more aggressive in the database sector and posing to be a threat to Oracle, its price-to-earnings is just 23.12, compared to Oracle's 15.69. IBM earnings have been flat in its more recent quarters. Oracle on the other hand has been dominant in the sector, with profit in the period ending August put between 51 cents to 55 cents a share. Microsoft's share price has been steady in the past few months because investors awaited the release of Window 8, the most extreme redesign of Microsoft's flagship operating system since 1995. Given all this, Oracle is much more attractive than its rivals at its current price of around $30. Long-term investors should consider buying Oracle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.