Oracle (ORCL) is a dominant force in the software world, especially in database technology. Its share price is currently $31.02 per share, which gives it a market value of $149.3 billion. Oracle's closest competitors are CA Inc. (CA), Microsoft (MSFT), and IBM (IBM).
Why buy Oracle?
- Oracle's customers are likely to remain with Oracle even though there are cheaper alternatives. The database business have very high switching costs, meaning that businesses which already use Oracle are likely to continue to use Oracle. The only problem the company faces is how to attract new companies into the Oracle fold.
- Oracle offers a better products than its closest competitor, IBM. Oracle has integrated its software and hardware technology, allowing consumers to launch appliances without expensive integration costs. This is much more preferable for companies than IBM's service-led approach as tackling large overhead costs is becoming increasingly important for firms.
- Oracle's high free cash flow of $13.095 billion, its practically zero debt-to-equity (0.3 compared to an industry average of 9.6), and its strong net income of $9.981 billion put the company in a good position to counter any threats from smaller competitors. It would be fairly easy for Oracle to increase its capital expenditures due to its large free cash flow.
- Oracle is also growing at more than double the industry average (revenue growth of 16.9% vs. 8.2%), and its EPS growth is 21.6% vs. an industry average of 12%. These figures should make it a very attractive option for growth investors.
- As the cherry on top, Oracle also offers a small dividend of 0.76%. It currently pays 6 cents per share quarterly, offering a 24-cent return annually in dividends. Investors should not buy shares for the dividend, but it is a nice bonus nonetheless.
However, Cloud computing might damage Oracle's long-term viability. New competitors such as Salesforce.com (CRM) are a dangerous threat to Oracle as they offer cheaper, cloud-based alternatives. However, in general, Oracle's customers are risk averse, and would rather choose a proven hybrid method of both cloud and on-premise solutions than taking a risk with a new company purely focused on providing cloud computing.
While Oracle is a fantastic company, it will probably drop a bit further over the coming weeks. Therefore, I recommend that investors wait until the share price drops to around $28.00. At that point, I believe Oracle would be a great bargain to pick up.
All data is sourced from Morningstar.com and Google Finance.
Disclosure: I am long MSFT.