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Investors in Oracle (NYSE:ORCL) are facing modest losses on Thursday after the company was subject to two fresh bearish research reports questioning Oracle's competitive position in the fast moving technology world.

The warnings turned investors cautious just a weak ahead of the company's second quarter earnings results. I remain cautious being very much aware of a potential value-trap given the pressure on Oracle's competitive pressure.

Analysts Turn Cautious

Two prominent research firms released bearish comments on Oracle on Thursday. Analyst Ross MacMillan at Jefferies lowered his rating on the firm from "Buy" to "Hold." At the same time he lowered the price target by three dollars towards $32 per share, suggesting some 7% downside from Wednesday's closing levels.

MacMillan sees Oracle feeling "the pinch" on its core database business from SAP's (NYSE:SAP) HANA in-memory computing approach. Oracle's database solutions face not only this threat, but also greater adoption from SaaS enterprise customers who favor Salesforce.com (NYSE:CRM) or Workday (NYSE:WDAY). Oracle is furthermore subject to competitive risks related to new approaches which can analyze huge quantities of unstructured data.

Oracle's engineered system strategy is providing challenges. The adoption of Oracle's Exadata and Exalogic systems are challenging and if the company's strategy will fail this will have big consequences for growth.

On top of MacMillan's bearish comments, analysts at RBC Capital lowered their rating on the stock as well to "Sector Perform." Analysts at RBC attached a $35 price target to the stock, suggesting very limited upside from current levels.

Valuation

Halfway through September Oracle released the results for its first quarter of fiscal 2014. The financial position of the firm remains rock solid with little over $39 billion in cash, equivalents and marketable securities. Even with a debt position of $24 billion, the firm holds a net cash of some $15 billion.

The current valuation at $34 per share implies that Oracle is worth about $158 billion, or $143 billion backing out the net cash position. This values operating assets at 3.8 times annual revenues of $37.2 billion and 13 times 2013's annual earnings of $10.9 billion.

The quarterly dividend of $0.12 per share provides investors with an annual dividend yield of 1.4% in the meantime.

Some Historical Perspective

Shares of Oracle fell to lows of $10 in 2012 after the internet bubble. Shares have seen a very steady recovery ever since, and have traded in a $25-$35 trading range in recent years.

Shares have hardly risen so far this year amidst increasing signs of intensifying competition. New forms like cloud competition and SaaS-based business models are popular with Oracle's customers.

Despite these concerns, Oracle has shown impressive growth between 2010 and 2013. The firm has grown its revenues by some 40% to $37 billion in 2013. Earnings doubled to levels just short of $11 billion while the company has retired shares as well at a modest pace, boosting earnings per share.

Investment Thesis

Oracle could be the latest big technology firm struggling with emerging competitors, products and business models. While the financial position is very strong and earnings are still at record highs, earnings growth has stalled.

Other big established names like Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO), IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ) are facing big headwinds in their core markets operating with outdated products, business models, or dealing with strong emerging competitors.

In the case of Oracle it is not just traditional competitors like SAP which are hurting the company, but even more so from emerging names like Salesforce.com in particular.

Back at the start of December, when research firm Standpoint Research lowered the recommendation of the firm, I last took a look at Oracle's prospects. The strong performance of the shares over the past decade has been driven by operational improvements, largely on the back of margin expansion and large buyback programs providing fuel behind the shares.

Yet there are clear warning signs at the moment with both revenues and earnings stagnating at the moment. Notably the flexibility of SaaS business models, which relies on monthly subscriptions rather than large upfront investments as is the case with Oracle, provides flexibility for corporate customers. These companies can record their software solutions as stable monthly operating expenses instead of huge upfront investments.

When comparing the very modest growth of Oracle to double-digit or even triple digit growth rates reported by emerging competitors it is clear that Oracle's dominant and competitive position is under pressure. What's worrying is also the relative weaker position of the firm related to unstructured data.

As should be stressed, current earnings of technology companies don't say too much. The very quick technological changes can quickly erode the competitive position and even quicker the earnings potential of these firms. The valuation at 13 times earnings might look appealing at current low interest rates. Yet note that recent earnings per share growth has largely been driven by share repurchases instead of actual earnings growth.

As such I agree with investors and are very cautious to avoid the "value-trap," carefully monitoring Oracle's competitive position.

I remain on the sidelines as I am not 100% confident in Oracle's ability to transform again.

Source: Oracle: Analyst Concerns About Competitive Position Intensify