As a long-time Microsoft (MSFT) and Oracle (ORCL) shareholder, I have always had an appreciation for software companies - one of the biggest sub-groups In the technology sector. However, as with anything else, not all software is the same as investors must separate the good ones from the bad - and this can be a bit tricky. After all, with so many from which to chose, how does one really know which idea will thrive and which ones won't?
As technology starts to embrace the idea of the cloud, I feel inclined to focus on the companies that are adequately prepared to make this transition - hence knowing which ideas will thrive for a chance at producing solid market-beating performances.
I'm going to lead with one of the cloud pioneers in database giant Oracle. As the cloud continues to consolidate Oracle will remain one of the top players within the space as well as the enterprise. The stock took a slight dip last year when it disappointed Wall Street. But I think many overlooked the fact that Oracle had anticipated weakness in certain segments of its business and was focused on strategically positioning itself for the technological shift within the cloud - one that will allow it to maintain its dominance in the corporate enterprise sector for years to come. We have seen recent evidence of this strategy when it acquired RightNow, the cloud-based customer experience suite designed to help organizations deliver customer experiences across the web and social networks.
For Oracle, with the stock now trading just under $29 after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions. The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications.
In a recent article, I made a case for why I thought Microsoft was ready to take on Apple (AAPL). It seems there are very few analysts who share my optimistic view in terms of the company's long term prospects. There is growing evidence that Wall Street does not give Microsoft enough credit for being able to transition itself with time accordingly - particularly with the cloud. But I think this is where a mistake is being made. The company understands and appreciates this reality and has been working to adjust accordingly - particularly with its efforts to make a more workable platform for mobile devices.
To that end, it has partnered with ARM Holdings (ARMH) to license its chip technology which is a different architecture than what it has been comfortable with Intel. All of this is on top of its Windows8 launch as well as its position for the cloud - something for which I feel the company is not sufficiently credited in the same breath as database giant Oracle and the aforementioned IBM as well as Google (GOOG).
I'm not proud to say that Salesforce.com has made me look extremely foolish over the past couple of years - mostly because of how it continues to defy all logic and common sense for its ingenuity and being able to capitalize on bringing customers and businesses together. Well, that's only part of the reason. The truth is, it has made many analysts look foolish for doubting its ability to grow and justify its enormous P/E. As an Oracle investor, it brought me much pleasure to dislike one of its main competitors in Salesforce.com, but I do appreciate that it is indeed a formidable opponent when it comes to the cloud.
From a stock perspective, the company continues to generate such a following by a community of analysts because of its perceived expensive valuation. On that note, there are many who are waiting to be proven right. But it is something to watch as the downside risk remains incredible. It only takes one bad quarterly miss to cause the stock a 50% drop or higher in the stock price as its many bulls will want to immediately secure their profits.
The technology sector as a whole will continue to lead the market well into the future. Software companies in particular will be the primary drivers of the cloud-based initiatives that many corporations and even consumers are preparing for. Apple has had a hand in bringing that term to the mainstream whereas before it was primarily used to describe back-end data storage services. For this reason, software companies are well positioned to generate high-margin businesses to produce the type of growth investors crave.