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Oracle (NYSE:ORCL) reported a very strong and solid May 31, 2007 fiscal 4th quarter Tuesday. Revenues were up plus 20% and earnings came in 2 cents better than Street expectations. With the stock trading at $19+, there is a solid upside to the $25-26 level over the next 9-12 months.

Oracle has executed on a well-thought out strategy to leverage its core database customers. With a Gartner research estimate that Oracle commands 47% market-share in the database sector, it's a mixed conundrum for Oracle: great, sustainable operating margins north of 35%, but organic database growth just over 10%. So where, and how, does Oracle earn a premium multiple on its stock?

Oracle has a history of disappointing application products. Its research and development effort was woefully lacking in generating cutting-edge, exciting products to compliment the database superior product suite. Up until 2 years ago, applications revenues were a hit and miss proposition quarter to quarter. Finally, Oracle threw in the towel and began to acquire the valuable properties it needed to round-out the total product offering.

Some 35 acquisitions later, and more to come, Oracle can lay claim to the applications leader status. The highest profile acquisitions were PeopleSoft in the Human Resource space and of course, Seibel Systems in the customer relationship management [CRM] space. Bottom-line, the applications products is where the greater growth is.

Oracle has a model that is unbeatable: strong license sales followed by maintenance and upgrade agreements. The result is a predictability and visibility of revenues and solid earnings. I estimate that Oracle can earn $1.15 for May 31, 2008, and upwards of $1.30 for May 31, 2009.

With visibility, market dominance and high, sustainable operating margins, Oracle should command a PE multiple of 22-25 times, thus a price target of $25-26 over the next 9-12 months.

ORCL 1-yr chart
ORCL

Disclosure: none.

Source: Oracle Shines On 4Q Results: Expecting 25-30% Upside