I like Oracle's (ORCL) direction as it continues to make acquisitions (like its latest- Acme Packet) to expand its software application division which offers the best margins for the company. I can see how the latest acquisition will expand the company into telecommunications. I continue to see good things with this expansion as Oracle leads the market in this new arena of "software-defined networking."
The fact that last quarter the company saw new software sales rise by 17% to $2.4 billion was a good sign because the high margins and long term maintenance contracts are the most lucrative for the company. Analysts were supportive of my thoughts. New price targets were set from ($36.50-$40.00) and the stock is presently trading at 34.90.
I believe Oracle should continue to do well as it expands its "one stop shop" system. The latest build up was announced with the acquisition of Acme Packet, the network specialist, for $2.1 billion. The price seems high though. Several analysts have called the 22% premium increase for Acme Packet high given Acme's slipping market share, but noted that it's likely to help others in the area that may suddenly look like targets. Acme just so happens to compete with Cisco (CSCO) and Hewlett Packard (HPQ).
Acme Packet is known for selling hardware that larger telecommunications companies use to manage the transmission of phone calls that use the same technology as internet communications. What does this mean for Oracle? It could mean the natural move into networking equipment. This is one area that Oracle's global tentacles have not reached into. But many of the companies in this field are familiar with and use Oracle's business management software and database, so it is a good move.
This may also be the defining future for Oracle as it continues to expand into this new "software-defined networking." This area of marketing allows businesses to reduce network gear in data centers and replace a lot of the functional work with software centralized in a server. Oracle leads the industry and this is not its first acquisition in this field. In July it bought Xsigo which is also in this industry. The company must be doing well considering the stock gained 63% in the last 90 days, long before Oracle came on the scene. There is a three way race to dominate the cloud market between Oracle, Microsoft (MSFT) and Salesforce.com (CRM). These two acquisitions strengthen its position.
Oracle has been on a strong bullish run since mid November, gaining about 21% in value since then. The trend still looks strong as I see the stock remains above the middle Bollinger band. I would expect the stock to move below and touch the lower band when it slows down. The only sign I can see of a possible slow down coming is from a negative divergence I see. I can see this both in the RSI indicator and also in the MACD-stronger in the MACD histogram. With two signs, I believe the stock will top soon.
The Options Play Revisited
In the article I wrote December 26th 2012 about Oracle, here is the options play I suggested:
The Options Play
Trading at 33.61, I believe the stock continues to move up. It many see a pull back or a sideways move for a bit but I believe it will continue to move up.
- Buy a March 2013 call with a strike of '34' (priced at $1.15)
- Sell a March 2013 call with a strike of '35' (priced at $0.71)
- Net Debit to Start: $0.44
- Maximum Profit: $0.56
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Sales in the software division will continue to be good for the company.
- Momentum should keep the stock moving up.
The stock is trading at 35.48. Reversing the trade:
- Sell the March 2013 '34' call- $1.81
- Buy back the March 2013 '35' call- $1.11
- Gross Profit: $0.7
- Net Profit: (Gross Profit $0.70 - Net Debit $0.44)= $0.26
- ROI: 63.6%
The trade was reversed at this time because the stock had risen to the point where the options were in the money and since this is how they increase in value so I turned around and reversed the trade for a profit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.