Oracle Makes New Post-Tech-Bubble Highs

Includes: JAVA, ORCL
by: Ockham Research

“It’s all about tech today Oracle saying that business is picking up, up 5% and expects European Regulators to say go ahead and buy Sun Microsystems.” — CNBC’s Squawk on the Street 12/18/2009

Technology giant Oracle Corp. (NASDAQ:ORCL) reported earnings on Thursday night that topped analysts’ predictions on both the top and bottom line. Revenue was expected to grow moderately over the period a year ago, but thanks to improved sales to U.S. businesses revenue grew 3.3%. Net income rose 13% to $1.46 billion, and when excluding one-time costs earnings per share came in at $.39, three cents better than analysts had expected.

The takeaway from the quarterly report is that enterprise IT spending may finally be returning to more normal levels after some tough years. Many of Oracle’s customers are also largeORCL corporations and as the global economy has been sluggish, these firms have been very reluctant to spend on IT. Oracle expects new software licenses to grow by -1% to 9% in the current quarter. Management guided for earnings per share to come in at $.36 to $.38, which makes consensus estimates of $.36 look conservative. Shares of Oracle are trading more than 6% higher on extremely heavy volume on Friday morning, and although it has cooled since, early in the morning Oracle hit its highest price since early 2001.

Oracle management says that they believe the European Union Regulators are warming to the proposed $7.4 billion merger with Sun Microsystems (JAVA) after months of scrutiny. U.S. authorities have already signed off on the deal, and the EU remains as the final hurdle. The deal would make Oracle one of the dominant players in both its traditional software business but also in the hardware/server business. Oracle is a serial acquirer scooping up more than 60 firms in the last five years, and in most cases the company is able to integrate the new companies into the fold with relative ease. CEO Larry Ellison said that he hopes the deal will close in the next quarter, and when it does he wants to focus on the high performance end of the server market.

Even as the stock is hitting new multi-year highs, we continue to see Oracle as Undervalued. This stock has normally traded for a price-to-sales per share range of 4.9x to 7.8x, and the current multiple is only 4.1x. Similarly, price-to-cash earnings we have observed the stock normal trades between 16.5x and 26.5x, but it is currently well below that range at 15x. The company is showing the market encouraging signs of the return to corporate software spending, and we are confident in management’s vision for the company going forward including the acquisition of Sun.

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