Oracle (NASDAQ: ORCL) is still the world's largest seller of enterprise software. It has more than 400,000 big and small corporate clients across 140 countries. It has a solid history of annual growth for the last three decades. The company is the undisputed leader in providing corporate database management to the biggest corporations in the world.
The company's recent diversification toward cloud-based and hardware-based services has dampened investors' enthusiasm for it. Oracle's move toward creating revenue streams outside its proven core Software as a Service expertise is seen as a high-risk act by many. Based on recent analysts' stock reports, majority of them rated Oracle as not a good "short-term investment."
Oracle itself admitted in its annual report that it is vulnerable to several risk factors. As per the annual PDF report, "Our limited experience with managing our hardware business and forecasting its future financial results creates additional challenges with our forecasting processes." Oracle's management warns its investors that, at the moment, the company is open to uncontrollable risks as it expands its business. New competitors, unforeseen technology innovations and international government actions offer unpredictable threats to the profitability of Oracle.
Due to this confession of the company's exposure to new risks, analysts are predicting a poor stock performance for Oracle for this year. Some of them even strongly advised a sell order for Oracle shares as soon as possible to minimize short-term losses.
Due to the high-risk valuation for Oracle, several of its key stock investors have recently dumped their shares. Even company insiders have sold a substantial part of their Oracle share holdings - farther worsening the gloomy outlook of the company. For the last 30 days, several Oracle employees have dumped more than 525,000 shares in the market. For 2013, more than 5.2 million shares held by company insiders have been sold. And since January no Oracle employee has bought any share of the company.
Thomas Kurian, EVP of Oracle, sold 400,000 shares of his Oracle holdings on September 27, reducing his ownership by 20.2%. Oracle SVP, Dorian Daley, also sold 100,000 shares on September 25, reducing his personal stake in Oracle by a whopping 64.5%. Other Oracle employees also sold some of their shares in the company. These actions only served to exacerbate investors' loss of confidence over Oracle's current value.
Larry Ellison, Oracle's Founder and CEO, has recently made big acquisitions which he deemed necessary to expand Oracle's business model. Obviously, some of his employees are not happy about his decisions judging by their recent sell-off of their company shares. However, Ellison is committed to diversifying the company toward cloud-centric services and hardware manufacturing. Although Oracle stock price is down to $32, he is confident that the company's cash-cow, Oracle database SaaS, will deliver enough money to help offset the financial costs of acquiring and operating new businesses.
The company made some very huge acquisitions recently. Oracle bought RightNow for $1.5 billion, Taleo for $1.9 billion, Acme Packet for $2.1 billion and Eloqua for around $900 million. Except for Taleo, all these new acquisitions used to be competing cloud-based SaaS solution companies. Their purchase therefore was deemed very vital to help Oracle establish a solid footing on the new profitable cloud database management market category.
Analysts and veteran investors are criticizing Ellison for overpaying for these new companies. But the Oracle CEO loudly dismissed his critics by saying all these companies are worth their price and will greatly help his company's long-term Ccloud strategy. He told stockholders to trust his solid track record of making smart acquisitions over the last 10 years. He did buy some very costly but now very profitable companies like Sun, Siebel, Hyperion and PeopleSoft.
Valuation and Financial Strength
Oracle is a monster money machine. While it is only the third largest software maker by gross revenue, it has a much higher Gross Margin percentage (81.5%) than its two leading competitors, IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT). It also enjoys a higher Operating Margin (39.2%) than those two. Ellison's company also boasts an impressive bigger Price to Sales Ratio of 4.11x than IBM and Microsoft.
Most investors ignore this great financial performance advantage of Oracle over its competition. Long-term investors who follow Warren Buffett's value investing principles should realize Oracle is a great buy for long-term profits. While Microsoft is struggling in its bid to expand to smartphone hardware and cloud-services, Oracle is better poised to enjoy a smooth transition toward the cloud thanks to its acquisitions.
True, Oracle's stock price has missed the 40% increase that other S&P 500 companies enjoyed within the last two years. But Oracle is still enjoying a solid Return on Equity of 25.52% which only proves that Oracle is able to reinvest its profits better than the 92% of its competitors.
This great financial performance is thanks to its cash-cow, Oracle database software, which contributed $27.5 billion out of its $37.2 billion gross revenues last year. Warren Buffett, the godfather of value investing, calls Oracle a company with a "great advantage over the competition." He pointed out that the company's business model is a perfect money-machine because Oracle's customers are sticky-glued to Oracle's database services.
They will have to keep renewing their Oracle licenses every year to maintain their corporate database. According to trefis.com, 95% of Oracle customers renew their annual licenses. It is true, out of last year's $27.5 billion software revenues, $17 billion came from software updates and renewals. The other $10 billion came from new licensors.
Ignore the current dismal review of Oracle. It is a very solid investment for big long-term profits. The company's growth is temporarily slowed down by its huge purchases of SaaS entities that will help Oracle dominate the new cloud-based database market within the next 5 years. While Oracle's management is inexperienced, the people from RightNow and Eloqua are cloud database pioneers and they will steer new customers and more revenues.
Oracle's profits for the next 3 years will probably keep going down and won't maintain their current 25% Return on Equity. The transition to hardware manufacturing to compete with HP (NYSE:HPQ) and Dell's (NASDAQ:DELL) dominance of the server market will also bleed the company. Remember, Oracle now owns Sun Microsystems and it is now stealing customers away from HP, Microsoft and Dell by offering cutthroat pricing.
Expect Oracle to rebound by the 4th or 5th year as the company finally padlocks the Cloud database market. While its stock is only hovering around $32 today it might hit $90 within the next 5 years if Ellison's master plan of cloud domination pushes through.
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.