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In about two months' time, Oracle Corporation (ORCL) will be reporting results for the fiscal year ending May 30, 2013. FY 2012 results of the company revealed a 16.77% increase in net income over the prior year. This time around, analysts are expecting the company to register an almost 20% increase in earnings per share.

The most recent quarter (ended February 27, 2013) results, reported in March 2013, revealed a 3% decline in net income. Since then the company's shares have declined more than 9%. Is this a short-term reaction to earnings? Does this present an opportunity for short- and long-term investors? Let us try and find out.

Good results but falling stock price

Oracle Corporation is engaged in the business of enterprise software, computer hardware and services. It develops, manufacturers, sells, hosts and supports database and middleware software and applications software. The company's hardware offerings are primarily made up of computer server and storage products.

Oracle is a $152.48 billion market cap company with total annual revenue exceeding $37 billion and a net income of $9.98 billion, an increase of $1.43 billion over the prior year. As of February 27, 2013, it held more than $30 billion in cash and cash equivalents and short-term investments, which was more than what it held at the end of previous fiscal. The total long-term debt was also lower by more than $1 billion.

Shares of Oracle's major competitors, International Business Machines Corporation (IBM) and SAP AG (SAP), too have reacted the same way.

IBM, a $212.30 billion (market cap) company, reported annual revenue of $104.50 billion and $16.60 billion net income. While revenue was down 2.25%, net income increased 4.72%. However, IBM shares fell more than 8% on Friday, April 19, 2013, after release of Q1 FY 2013 results, probably because it failed to come up to market expectations of $3.06 per share for the quarter and $25 billion revenue; the company reported an earnings per share of $3.00 on revenue of $23.4 billion. Following the lower-than-expected results, Deutsche Bank analyst Chris Whitmore lowered the price target to $225 from $240, even while he reiterated a Buy rating on the stock.

SAP, a software company based in Germany, reported $21.39 billion revenue, up 15.67% and net income of $3.72 billion or $3.17 per share. In this case too, the stock fell nearly 3% after results were declared. Software products offered by SAP allow companies to do their accounts and manage customer relationships. The company's clientele includes some the world's largest corporations such as Procter & Gamble and Intel Corporation. The company has now branched out to cloud computing and mobile applications. It is also relying on its new database software, HANA, for future growth. HANA, which allows users to process vast amounts of data in a short time, registered a 300% year-on-year revenue growth.

Oracle Cloud - Cloud computing with a difference

Unlike its competitors, Oracle is trying to offer cloud computing in a SaaS (software-as-a-service) model instead of the traditional model of upfront payment for software licenses. The company's cloud-based computing offering is called Oracle Cloud, which is a proprietary hardware, complete with expensive servers and a solution stack. It is designed in a way that customers do not have to make fundamental changes.

Oracle announced recently that it is acquiring a startup cloud infrastructure management software company, Nimbula.

Oracle's efforts to build a complete cloud solution all by itself instead of offering it on standard software are being seen both ways. On one side are those who think that it is designed to boost Oracle's revenues. On the other side of the fence are those who believe that customers are likely to raise questions about the cost factor and prefer software that allows them to save on cloud computing. There is also a visible shift in the market, which is trending towards open source.

Oracle is also collaborating with Microsoft in a campaign for fostering and defending competition in online and mobile search. The campaign is apparently targeting Google's practice of biased search results and its open source Android.

Oracle's fight to protect profits

The Federal Trade Commission (FTC) closed its investigation of Google simply on the basis of Google's voluntary commitments. The settlement, however, is not the final word on the issue. It is likely that the matter may go out of FTC's hands and the final decision may be based on investigations by the state attorney generals and the European Commission.

In the end, it is going to be a battle between open source and paid software and SaaS. Google can afford to offer Android and search capabilities free because it generates most of its revenues from advertisements.

Oracle's power of conviction is evident from the fact that it is using the antitrust law to attack Google and lawyers and lobbyists to defend its business model, despite the changing trends. The company appears to be on a mission to save its assets and profits.

Oracle seems to be ready to pay any price to keep doing what it has been doing. Oracle took over Sun Microsystems' open source assets including Java, OpenOffice and mySQL. As users became increasingly dependent on mySQL, a relational database management system, Oracle made it more proprietary and put a hefty price tag to it.

Analysts' take on Oracle

Brendan Barnicle of Pacific Crest Securities expects the Oracle stock to outperform. His outperform rating stems from his understanding that below expectation third-quarter results had less to do with demand for the company's products and was more about internal issues. In his report, he quotes Oracle's CEO as saying that the company is successfully moving ahead towards transition and selling its Fusion package that offers customer relationship management and human relationship management on a single platform.

Zacks Investment Research, which supplies research to Nasdaq, expects Oracle to report 8.94% earnings growth in May 2013, and continue to grow at an annual growth rate of more than 12% over five years. A short-term reaction to quarterly earnings should not be a reason to lose faith in a company that has returned 200% in 10 years and 80% since 2009.

Conclusion

Continuous watch on quarter results often misleads investors as they tend to overlook the fact that most companies traditionally have "weak" quarters and "strong" quarters. Personally, I am not a believer in reacting to such events and prefer to go by fundamentals and prospects of future growth.

Oracle is a strong company with a strong balance sheet and gross margin of 80%, which is above the industry average and even better than its competitors, Microsoft and IBM. The same is true for the company's operating margins.

If I was to invest in Oracle, I would rather do now when the stock is trading at a reasonable P/E multiple. Another month and half from now and the stock will start factoring in analysts' estimates of good results and become overvalued.

Source: Oracle - Why You Need To Buy Right Now