The stock closed Friday at $39.61, up 4.5% on the year to date, but lagging the tech sector's 9% gain. This has led to investors to wonder if management has what it takes to get the Oracle back to long-term growth. But I think it's way too early to start to panic.
The bullish case for Oracle is simple, as businesses strive for growth and differentiation, this will always place more demand on IT services. And as IT services get more complicated, it will require increased levels of expertise to manage the enterprise. There is no other company more capable of delivering these services than Oracle. Larry Ellison, the company's CEO doesn't play second fiddle to anyone.
What's more, despite the perceived lack of growth, nothing beats higher profits. To that end, with close to $40 billion in cash on the balance sheet and another $15 billion in operating cash flow, there are very few companies anywhere that can match Oracle's balance sheet and overall financial muscle. And it certainly looks as if Ellison is beginning to flex.
Last Thursday, Oracle announced it was buying TOA Technologies, a company that specializes in cloud services for employees in the field. These "field services" focus on business such as repair technicians, service delivery drivers and so on. Sounds like Oracle plans to take a chunk out rivals Salesforce.com (NYSE:CRM) and Workday (NYSE:WDAY).
Although the terms of the deal was not disclosed, it is clear that Larry Ellison understands his company's growth challenges are real. And as he's done on more than a dozen occasions over the past year, he's unafraid to use his deep pockets to service that need.
TOA Technologies comes just one months after he's spent $5.3 billion on Micros Systems (NASDAQ:MCRS), a software specialist company for the restaurant and hospitality industry. This was Ellison's largest deal since picking off Sun Microsystems for $7.4 billion in 2010.
In both TOA Technologies and now Micros Systems, Larry Ellison sees an opportunity to accelerate its growth in cloud computing where Salesforce.com and Workday continue to take chunks out of Oracle's market. That said, I think it's a mistake for investors to continue judging Oracle only by it's top line growth.
While Ellison may have found deals he thought he couldn't pass up, make no mistake, the merits of both acquisitions will be assessed by what they contribute to the bottom line. In the case of Micros Systems, consider that in its most recent quarter, the company delivered revenue and earnings growth of 7.4% and 13.6%, respectively.
Equally impressive, the company's management has guided for fiscal year 2014 revenue to reach as high as $1.385 billion, which suggests 9.2% year-over-year growth. Full-year non-GAAP earnings-per-share is projected to grow to $2.57, or 8% year over year.
Combine this with the rapid growth of Oracle's Engineered Systems business and its Cloud Applications business, you have a company that is emerging as a one-stop-shop for the enterprise. Customers want a vendor that can integrate the hardware and software and make it work together. Neither Salesforce.com or Workday can say that.
From my vantage point, it's foolish to bet against Oracle, which is being led by a CEO that will look under every rock to win. Given Oracle's size and scale and its strong innovative edge, not to mention its $40 billion in cash, patient investors should expect a stock that reaches $45 in the next 12 to 18 months. From Friday's close, this suggests a premium of roughly 14%. And that's not bad for a "slow-growth" company.
Disclosure: The author has 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 Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.