Is New Oracle Partnership A Match Made In Heaven Or Hell?
Will Oracle (NYSE: NYSE:ORCL) investors benefit from the partnership of former competitors Oracle and Salesforce.com (NYSE: CRM)?
According to principals from both companies, the answer is yes. Oracle's Larry Ellison and Salesforce.com's Marc Benioff are both saying they are joining forces to integrate their technologies because it's what their customers want. According to reports in Forbes and by The Motley Fool, customer needs are the driving force behind this partnership, which some stock analysts are calling ironic and others have called an "unholy alliance," due to the acrimony that used to exist between the two companies.
Ellison said in the Forbes report that customers of both companies - mostly software companies and app developers - use products from both companies. He explained that without the new partnership, these customers would have to hire a third party to integrate the products, so it makes good business sense for the two companies to do the integrating and deliver them as products. Forbes also explained that any integrations done by a third party would likely be inferior to, and yet cost more, than the integrations done by Oracle and Salesforce.com, which is another way customers - and ultimately shareholders - will benefit from the new partnership.
Cloud computing is the primary arena where Oracle and Salesforce.com are focusing on, which they and stock analysts say is the area that will generate the most growth in today's market. Ellison has been quoted as stating that hardware is also an expected growth area for Fiscal Year 2014.
Since the partnership positions Oracle for growth, that is also good news for investors, and given the company's history of steady (but sometimes small) revenue gains every year, and gains in earnings per share annually, the numbers seem to bear out Ellison's and Benioff's predictions. According to Oracle's filings with the Securities and Exchange Commission, for fiscal year 2013, which ended on May 31, revenues increased to 37,180,000 up from 37,121,000 in F.Y. 2012. Diluted Earnings Per Share were $2.26 in FY 2013 compared to $1.96 in FY 2012.
The Wall Street Cheat Sheet which rates stocks in one of three categories - Outperform, Wait and See or Stay Away - rates Oracle's stock as a long-term Outperform, and recommends investors buy it. The Cheat Sheet based its recommendation on the annual increases in revenue and earnings, high margins, strong operating cash flow at $13.72 billion, and its consistent performance annually. The Cheat Sheet also cited the fact that Oracle made a profit in FY 2008 and FY 2009, which, given the state of the stock market during those years, was practically unheard of.
Stock analysts typically like to see EPS numbers increasing faster than a company's revenue because it indicates increased efficiency in the way the company is run. This typically translates to more profit for stockholders. If a company's numbers look this way because it is laying off employees and leaving its work force too thin for the long term, or using cost cutting measures that affect product quality, this rosy picture will likely not look rosy for long, and will eventually catch up with them.
Oracle's EPS numbers are growing at a larger percentage than its revenue, so that's another reason analysts are recommending Oracle stock. But one Oracle employee, according to the Wall Street Cheat Sheet, was quoted as saying that Oracle's numbers look good because it is "focusing on hiring employees outside the U.S. Even though the margin is very high, this company is bent on increasing its margin every quarter, even at the expense of employees and customers." The Cheat Sheet sees this employee's insight as a positive for investors but "not so good for employees."
The NASDAQ stock report for Oracle, as of Aug. 5, 2013:
- 52 weeks high 36.43
- 52 weeks low 29.52
- Dividend Yield 1.47 %
- Annual Dividend $0.48
- P/E Ratio 14.5
- Shares Outstanding 4,630,807,000
Oracle's competitors in the database industry, are Microsoft (NYSE: MSFT), International Business Machines Corp (NYSE: IBM), Sybase and CA Technologies (NYSE: CA). Microsoft competes with its SQL server, which claims on its product data sheet that "more than 600 businesses migrated to SQL server in 2012." IBM is a major competitor of Oracle's, yet the two are partnering in the IBM Oracle Virtual University 2013, which provides education and sales and technical information to users who want to integrate products of both companies. Sybase has been in business for 18 years and even though Oracle has the greater share of the market, some customers are switching to Sybase because of the perception that Oracle is expensive and that Sybase is a better value. CA Technologies and Oracle also have a partnership in which CA provides support and security elements for Oracle databases, which include network and voice management and other functions.
Given Oracle's history for joining forces with some of its competitors to provide better products and service, this new partnership with Salesforce.com shouldn't be all that surprising. Time will tell whether it ultimately gives shareholders the growth they are looking for.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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