Seeking Alpha
Long only, long/short equity
Profile| Send Message|
( followers)  

Summary

  • Oracle took a hit after fourth-quarter results, as it felt the pain of a transition in the business.
  • Oracle is making solid progress as far as the transition is concerned, and recently agreed to acquire Micros to bolster its position further.
  • Oracle's solid profit margin and sound fundamentals make it a good buy on the pullback.

Oracle (NYSE:ORCL) disappointed the Street, as its fourth-quarter earnings and revenue failed to meet consensus estimates. The stock had been doing well this year and had touched a 52-week high recently, but the weak results have resulted in a pullback. In fact, Oracle shares dropped the most in a year after the results. In addition, Oracle's guidance also failed to match expectations, indicating that the company's business has slowed down. However, is Oracle worth buying on the pullback? Let's find out.

In transition mode

Oracle is currently going through a tough time, as it is transitioning to the cloud to compete with the likes of Workday (NYSE:WDAY) and Salesforce.com (NYSE:CRM). According to Oracle CEO Larry Ellison, "We are going to recognize the revenue more slowly, and that will somewhat affect the top line during the transition." But once the transition is complete, Oracle expects that it will be in a strong position to boost its numbers.

In fact, Oracle is already making positive moves in the cloud. In the previous quarter, the company saw strength in cloud SaaS (software-as-a-service), PaaS (platform-as-a-service), and cloud IaaS (infrastructure as a service). In addition, it delivered an improved performance in other areas, such as software license renewal, engineered systems, and NAS storage.

Management is positive about Oracle's execution. According to CFO Safra Catz:

We've successfully grown the company's revenues and earnings through every transition whether it was many computer database to a complete suite of products, client server to Internet, commodity hardware to engineer systems and now on-premise to cloud. We're well on our way into our most recent transition.

Growth ahead

Going forward, Oracle expects SaaS and PaaS to grow in the range of 25% to 30%, while Cloud IaaS is expected to improve in the range of 10% to 20%. The company is focused on becoming the number one player in cloud computing over the next five years, especially SaaS and PaaS, which are the two most profitable segments in cloud computing, according to management. As such, it is undertaking strategies to improve execution and bolster its position in the segment.

Oracle expects to become the foremost player in cloud computing, due to three reasons. First, it has the most complete and modern portfolio of SaaS products in the cloud. Second, all those SaaS applications run on a powerful platform, the Oracle in-memory, multi-tenant database, and are based on the popular programming language Java. Lastly, Oracle has greatly increased its sales force, which is now specialized and is lined up to sell SaaS and PaaS to compete against the new generation of cloud software competitors, such as Workday.

A key acquisition to drive growth

In fact, Oracle already has an edge over Workday in cloud ERP, as it bagged 120 new cloud ERP customers in the fourth quarter alone. Salesforce is another competitor in cloud solutions, but according to management, Oracle is the leader across more cloud solutions than Salesforce. In addition, Oracle's deal to buy Micros Systems for $5.3 billion will further boost its growth in cloud solutions and also allow it to protect the business from competitors.

As reported on Business Insider:

"Micros makes software and hardware for the hospitality and retail industries, including "point of sale" cash register tech. It has some huge clients, including the Hilton, Hyatt and Marriott hotel chains.

The latest wave in the POS industry is to replace these devices with tablets, and Micros offers a Windows tablet for this purpose. So, this deal also gives Oracle a tablet.

Some Wall Street analysts think this was a defensive move to keep up-and-coming cloud competitors away from Oracle's customers: Matthew Healey, an analyst at TBR, wrote in a research note:

The urgency with which Oracle is evaluating solutions for the retail and hospitality industry indicates that the acquisition of Micros Systems is a defensive move to protect Oracle's install base [from] other providers such as SAP and Salesforce.com.

But mostly, the acquisition is about buying revenue growth. The hospitality industry is in the midst of a tech revolution, moving from PC-based systems to tablets and cloud software."

Hence, Oracle seems to have made a smart move by buying Micros.

Fundamentals and final words

Although Oracle's outlook was not up to the mark, management is positive about its prospects. As the fourth-quarter numbers were not in line with Street expectations, the stock was in sell-off mode. But, Oracle has sound fundamentals, and is employing smart strategies to improve its performance going forward.

It has a trailing P/E of under 17, while a forward P/E of less than 12 indicates earnings growth. In addition, Oracle has a profit margin of 28.6% and an operating margin of 39%, indicating strong profitability. Moreover, the company's cash of $39 billion is more than its debt of $24 billion, which means that Oracle has the leverage to continue acquiring more companies and also investing in innovation.

Hence, investors should consider making the most of the stock's recent drop and add more shares to their portfolio.

Source: Why Oracle Is A Solid Buy On The Pullback