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There have been recent rumblings and worries about earnings performance and rumors of a management shake-up at Oracle (ORCL), but those seemed to have died down after a couple of very positive reports issued by the company. While there are continuing troubles on the hardware side of business, the software business is growing nicely and Oracle remains a very attractive undervalued major tech stock.

Oracle's recent performance is not necessarily fantastic when viewed on its own, but the company is doing well relative to its main peers and sell-side expectations. Revenue is rising about 1% as reported on a year-on-year basis, and more than 15% from the prior quarter. Sales growth came mostly from double-digit growth in software (particularly in applications), while sales of Oracle's hardware are dropping.

Oracle continues to show gains on the operating line. GAAP operating income rose over 11% in constant currency terms, and the non-GAAP operating margin was about a half-point better than the sell-side average estimate.

Tech investors have seen a sudden spurt of turnovers, as a couple of large companies have seen their heads of sales leave for new jobs. Oracle recently lost its head of North American sales, Keith Block. This would not amount to much at all except for the rumors behind his departure. According to the most prevalent rumor, Block made some rather disparaging remarks about Oracle's hardware business over instant messages to other Oracle employees. Hewlett-Packard (HPQ) is now trying to use these IMs in its legal case against Oracle. Hewlett-Packard has won the case at the trial level but Oracle's practice of porting software that runs on servers using Intel's (INTC) Itanium processors will continue as Oracle appeals the matter.

The Keith Block incident also underscores the fact that Oracle was drifting from its way. For Oracle to have major management team member bad mouth the company in that way signals deeper problems. This is a company that always talks itself up and touts its advantages over companies like SAP (SAP) and IBM (IBM). It's a good thing to see that when a high level employee makes such comments that Oracle does not tolerate it.

Oracle's management team is recognizing that cloud computing has the potential for serious growth in the coming years and has begun an aggressive campaign of touting its ability to capitalize on the market. Oracle has spent a lot of money to build up its cloud offerings, including a deal for Taleo costing $1.9 billion and a deal for RightNow costing $1.5 billion, and now it's time to start taking some of the momentum away from Salesforce.com (CRM) - arguably Oracle's bigger competitor in the field given both companies focus on software.

It can be said that Salesforce has a lead in the area right now and that a lot of what Oracle is doing is hype, but Oracle has always backed up what is says it can do. Therefore I believe Oracle is serious about expanding into the cloud computing market and the acquisitions we have seen so far are just the beginning of significant growth for the company.

Besides growth into the cloud computing sector there are other reasons to be bullish on Oracle. One such reason is the company's recent unveiling of Oracle Retail Customer Analytics, a new program that enables retailers to see what drives customers' buying decisions. This is a big step for Oracle, as it will help retailers increase sales and margins while better understanding buying patterns. The program is part of a group of business intelligence applications designed to give businesses better insight into a live sales environment. This program will be a successful one and go a far way to boosting revenue and adding value to the company's stock.

Oracle is at the tail end of a $10 billion stock buyback. Because of that I do not expect Oracle to make any major acquisitions during the coming year. However, I do expect the company to continue to buy small companies to boost its presence in the cloud computing sector and better compete with Salesforce.com. Having said that, though, the company has tremendous free cash flow, so it's not as though Oracle couldn't reverse course if the right deal came around and make a big splash.

Looking at the big picture with Oracle, the Street isn't buying what the sell-side is trying to sell in terms of growth expectations. Many analysts are projecting high single-digit revenue growth and improving free cash flow margins over the next five years. But even such analysis will result in fair value estimates well in excess of today's price of just under $31. Even a mid-single digit revenue growth estimate, which I consider very conservative, and no improvement in free cash flow conversion produces a price target at least in the mid-$40 range.

Many investors are turned off by Oracle's recent struggles in its hardware division, but too much emphasis on those problems result in a loss of focus on Oracle's overall strengths. The company is out in front of technological advances and is making the necessary moves to insure that the company remains a major player in the growing cloud computing sector. Its superb cash flow position and fantastic operating line make it a very attractive stock that is poised for good growth going forward this year. Oracle is a buy that will see 33% to 50% stock price growth this year.

Source: Oracle Poised To Jump 33% Higher By 2013