As cloud computing gains popularity among enterprises, software service companies are scrambling to capitalize on the growing cloud market. In such a scenario, it would be difficult to overlook what industry giants like Oracle (ORCL) and SAP AG (SAP) are doing to grow in the cloud market. In Oracle's latest deal it will provide its hardware servers for supporting cloud-based services, evidence of its initiatives to capitalize on market growth. Meanwhile, SAP is offering cloud-based applications that run on its database management system. Let's discuss how these companies will gain in the growing cloud computing market.
Deal over cloud and hardware segment
Oracle's hardware system segment's revenue declined by 9.25% year over year [pdf] to $ 1.4 billion in the fourth quarter of fiscal year 2013, due to a decrease in sales of its server systems. To offset this pressure, Oracle signed a deal with Salesforce.com (CRM) at the end of June 2013. Under this deal, Oracle will supply its Exadata servers to support Salesforce.com's cloud applications. Exadata is a database management server provided by Oracle. In addition to Exadata servers, Salesforce.com will use Oracle's Java middleware to support its cloud services. Java middleware is a technology that acts as a bridge between operating systems and applications over cloud.
According to Gartner, global spending on public cloud is expected to increase from $110 billion in 2012, to $131 billion in 2013. Cloud computing is gaining traction in enterprises, causing the strong growth. Salesforce.com is one of fastest-growing companies in this market, and with this deal, it is well positioned to capitalize on the market growth. Cloud services accounted for 67.6% of the company's total revenue, and the deal with Oracle is expected to grow this segment further. We believe that the company will generate higher revenue opportunities from this deal.
In the future, Salesforce.com will require more servers to support its growing cloud services. Exadata servers are expected to fulfill this need, consequently, fueling growth in Oracle's hardware and middleware software licenses segments. The combination of these segments accounted for 19.2% of Oracle's total revenue last year. Oracle is on the right track with this deal as it is expected to benefit from one of its major revenue contributor segments.
On July 22, 2013, continuing its partnership spree, Oracle announced a multi-year partnership with ARM Holdings (ARMH) to increase distribution of Oracle Java. This deal is expected to give Java a large distribution channel with ARM Holdings' growing semiconductor processors. ARM Holdings processors' royalty revenue significantly outperformed the semiconductor industry in the second quarter of fiscal year 2013. It grew by 24% year over year compared to the mere 2% growth of the semiconductor industry for the corresponding period. Growing the Java platform with ARM Holdings' processors is expected to increase Oracle's application software segment, which is another major revenue generating segment of the company. These developments in Java are expected to increase this segment's revenue contribution from 22.6% in 2012, to 23.6% this year.
Growing business with cloud services and e-commerce
During the second quarter of fiscal year 2013, SAP registered around 30 million users of its cloud business, which is the largest user base in the cloud market. The unveiling of SAP's cloud-based applications to run on its High-Performance Analytic Appliance, or HANA, platform is expected to further increase its user base. HANA is a type of database management solution provided by SAP. HANA is popular since it provides real time analysis for the database management system, and to deliver faster services, it was integrated with SAP's cloud-based applications.
Big client Florida Crystals has already started using HANA cloud services, and with the popularity factor of HANA, more such clients are likely to follow. SAP's software and cloud subscription segment grew 9% in the first half of 2013. Even if this growth remains constant, then this segment should generate around $2.8 billion in the first half of next year. We expect that the popularity of HANA and the increase in clientele will fuel this revenue growth rate, thereby generating additional revenue for the company.
SAP's e-commerce offerings are costly when compared to Oracle and IBM, making it less preferable to customers. To gain an edge over its competitors, SAP acquired Hybris, a rapidly growing e-commerce company, on Aug. 1, 2013. The acquisition cost is expected to be around $1 billion. Gartner placed Hybris as a leader in its e-commerce quadrant. According to Gartner, Hybris is fast growing; and its total revenue grew by around 90% in both 2011 and 2012.
SAP serves its e-commerce software to a customer base of around 40,000, and Hybris provides its e-commerce software to around 500 customers that include Procter & Gamble (PG), Nikon and Nike (NKE). This acquisition will add these giants to the vast clientele of SAP, thereby increasing its growth opportunity from the business intelligence software market. This segment contributed around 14.9% of SAP's total revenue of $21 billion last year. The major acquisition is expected to increase this contribution to 15.5% in 2013. We feel that Hybris's rapid growth will help SAP easily attain the increased revenue contribution.
Oracle is relying on its deal with Salesforce.com and ARM Holdings. With these behemoth deals, Oracle is expected to grow its major revenue contributing segments, thereby making its stock attractive. Oracle's stock is relatively undervalued. Its forward price-to-earnings growth, or PEG, ratio is 1.05, quite low compared with the industry's 1.27. The lower the PEG ratio, better the earnings growth in regards to the stock price. We believe that Oracle is running on the right track, so investors can attain the stock and those who are currently holding stock can expect long-term growth.
The deal between Oracle and Salesforce.com is expected to grow the largest revenue contributing segment of Salesforce.com. So, going forward, we believe that the deal will generate huge revenue opportunities. Considering the significance of the deal for Salesforce.com, we suggest a 'buy' for this stock.
Forward price earnings, or PE, is the ratio of the stock's current price and the next 12 months' earnings forecast. If the forward PE of a stock is less than the trailing 12-months PE, it implies that the company's earnings are expected to grow. The trailing 12-months PE ratio for SAP is 22.91 and forward PE for the next year is 14.94, significantly low, making the stock very attractive. The above discussed growth factors for SAP and its attractive valuation hint at a 'buy' for the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.