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Summary

  • The hardware segment accelerated growth, and cloud applications add significant growth.
  • The acquisition of BlueKai has played a positive role for Oracle in cloud-based marketing.
  • NoSQL market is a potential opportunity for Oracle to penetrate.

Oracle Corporation (NYSE:ORCL) is a computer technology company that specializes in developing and marketing computer hardware systems and enterprise software products. The company builds tools for database development and systems of middle-tier software, enterprise resource planning (ERP) software, customer relation management (CRM) software, and supply chain management (SCM) software.

Third Quarter 2014 Performance Analysis

The recent quarter results released by Oracle showed an increase in revenues and earnings. Apart from that healthy increase, investors might not be satisfied, because Oracle missed the earnings expectations and its sluggish growth is a major concern.

For the third quarter, the company generated $9.31 billion in revenues, reflecting an increase of around 4% compared to the same quarter of the previous year. However, analysts were expecting $9.36 billion. The company reported earnings per share of $0.68 lower than the expected earnings of $0.70 per share.

The growth was satisfactory, but hardware systems products revenues of $1.32 billion showed a good growth of 7% compared to the same quarter of the previous year. Oracle's hardware system revenues had growth rates of -22% and -16% in the third quarter of 2013 and the third quarter of 2012 respectively. It seems that the decline in Oracle's hardware system division may have bottomed out and we can expect continued increases in the revenues as bookings for its engineered systems increase. This improvement may be a step towards the turnaround for the hardware business. The engineered server systems, which include high-end products like Exadata and SPARC SuperCluster, also added 30% growth for the hardware business.

In the cloud computing market, Oracle is making heavy investments to catch up with its competitors. Oracle's own cloud applications software sales gained significant momentum of 25%, reaching $300 million in revenues. Oracle's core business activities contributed to the overall business growth. New software licenses and cloud software subscriptions revenues were up 4% to $2.4 billion. The software license updates and product support revenues were up 5% to $4.6 billion.

The BlueKai Acquisition is a Good Strategic Move

Cloud computing and big data have shifted the industry trends, and over the next few years, cloud computing and big data are expected to grow at a fast pace. The IDC forecasts the big data and analytics market will hit $16.1 billion in 2014, growing 6 times faster than the overall IT market. To fuel the earnings growth, Oracle needs a solid move. Oracle has an aggressive expansion history through its acquisitions that are spread across its entire product portfolio. Last year, Oracle acquired 8 companies, and most of them were related to cloud database. In addition to that, Oracle's recently released 12c cloud database and availability of in-memory capability by mid-2014 should allow Oracle to gain traction in terms of healthy growth.

Recently, Oracle announced it would acquire the cloud-based marketing provider BlueKai. The BlueKai solution includes its data management platform that centrally organizes a company's customer and audience data in the cloud to help implement personalized marketing campaigns across all channels and deliver better results and higher marketing ROI. BlueKai runs the world's largest third-party marketplace to augment a company's proprietary customer data, with actionable information on more than 700 million profiles. Oracle's marketing and social solution combined with BlueKai will give the company the ability to aid customers in building rich user profiles, combining information from first-party and third-party sources, including media, advertising, social, and mobile sources. BlueKai will be integrated with both Responsys for B2C marketing automation and Eloqua for B2B marketing automation. Oracle will be able to compete effectively and gain much-needed earnings growth though this acquisition.

NoSQL is the Right Opportunity for Oracle

Currently, the relational database management system market (RDBMS) market is totally dominated by the database market, but NoSQL systems have strong upcoming trends and its marketplace is passing through rapid transition. The NoSQL databases are finding significant and growing industry use in the big data and real-time web applications. Scaling web infrastructure on NoSQL basis has proven successful for Facebook (NASDAQ:FB), Digg, and Twitter (NYSE:TWTR). Successful attempts have been made to develop NOSQL applications in the biotechnology, defense, and image/signal processing.

The worldwide NoSQL market is expected to reach $3.4 billion by 2018, at a CAGR of 21% between 2013 and 2018. The NoSQL market will generate $14 billion in revenues between 2013-2018. Oracle jumped into this lucrative market through its Oracle NoSQL database, a distributed key-value database, and offers deep integration with the Oracle database. The market for NoSQL is small compared to RDBMS, despite the fact that companies are turning to NoSQL solutions. This is a big opportunity for Oracle to lead the market, as it did in RDBMS market.

Oracle holds a strong market of RDBMS and BI

Oracle has a strong footing in RDBMS and the business intelligence market. According to DB-Engines ranking, Oracle RDBMS stands at first position with a market share of roughly 40%, leaving behind MySQL and Microsoft (NASDAQ:MSFT) SQL server. The RDBMS market stands at around $26 billion this year, and going forward, with an annual growth of 9%, the market will hit $40 billion by the end of 2018. Oracle is in a very strong position to reap the benefits from the growing market, and the company's new product offering should strengthen its market position.

According to Gartner, the business intelligence (BI) market worldwide is projected to grow from $14 billion in 2013 to $18.6 billion in 2017, attaining a CAGR in the forecasted period of 2012-2017 of 7.3%. The Asia-Pacific region will show significant growth, and the market will reach $1.4 billion in 2014 and more than $1.6 billion in 2017. Oracle's BI market share in 2012 was 14.9%, and in 2013, the expected market share would be around 17%. Oracle intends to launch a SaaS-based BI offering this year to improve its product offerings. The potential growth and Oracle's strong position in BI and RDBMS puts the company in a favorable environment to boost its earnings in the coming years.

Conclusion

Oracle is fairly valued, and trading at P/E of 16.6x, compared to the 16.7x industry average and 18.2x of Oracle's 5-year average. The stock is trading at a forward P/E of 11.9x and at a discount of 25% from the S&P forward P/E of 16x. Oracle's earnings growth is expected to remain steady at a 5-year forecasted growth of 8.9%. Oracle's market lead in RDBMS and BI, combined with boosted growth from cloud applications and hardware sales, put the company on the much-needed growth track. The cloud and NoSQL will be one of the major opportunities for Oracle to avail. Although Oracle's growth lagged in the last quarter, the company is very well-positioned to grow, and the future prospects look favorable due to the accelerated growth from cloud applications and hardware sales. Oracle is a good stock for stable earnings, and I give this stock a buy rating.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.

Source: Oracle Looks Like A Promising Investment