Even with all the excitement from the shift in personal computing to mobile and tablet, enterprise computing of business software, services and large-scale computing infrastructure still offers tech investors a bigger marketplace. With consumers less reliant on traditional PCs today for many daily computing tasks, personal computing applications have become increasingly simplified and multi-sourced. Countless individual apps are designed for various, routine computing tasks, making it difficult for a company to really dominate the business of personal-computing applications. This can complicate investment strategies for investors looking for consolidated technology plays.
In enterprise computing, however, product and service offerings seem to have been converging with increased use of concentrated data centers and cloud services by corporations and organizations, compared to the divergence in user applications in personal computing. This opposite transition in enterprise computing gives providers of business hardware and software the opportunities to assemble a collection of product and service offerings to strengthen their business positions. Any company's failure to catch up on this new trend in enterprise computing will likely result in its having outdated operations and fewer customers.
Oracle (NYSE:ORCL) is a classic example for better understanding the fundamentals of today's changing enterprising computing segment. For years, Oracle controlled the field of business management software by installing its database and other software onto companies' computers for software license fees. With the Web now playing a larger role in business communication and management, more companies are outsourcing their traditional in-house computing capability to providers of cloud-infrastructure-as-a-service, such as Microsoft's (NASDAQ:MSFT) Azure and Amazon (NASDAQ:AMZN) Web Services, and thus will rely less on their traditional way of purchasing business software from vendors like Oracle. As companies increasingly subscribe business software as a service over the cloud from new competitors like Salesforce.com (NYSE:CRM), it's no longer only about the quality of the products for Oracle, but also about how Oracle can better deliver its products.
While Oracle is embracing the new business model of software-as-a- service, it has not built a network of its own cloud infrastructure to better deliver its software, relying instead on Microsoft's Azure and Amazon Web Services for certain access to its software. Oracle's limited cloud services benefit mostly the companies that still have certain degree of in-house computing capability. While this helps Oracle make up some of the losses from less software installation on clients' computers, it's not the solution for those clients that have turned their computing functions completely to cloud services such as those run by Microsoft's Azure and Amazon Web Services. To let those clients continue to use its software, Oracle has to partner with cloud services providers to make its software available on their cloud platforms, when Oracle doesn't have its own cloud infrastructure in place.
Elsewhere, IBM has acquired SoftLayer, a cloud-computing storage provider to prepare itself for better competing in the cloud-infrastructure business with notable players like Amazon, but also make it easier to deliver its service offerings to companies that prefer to have computing done on the cloud. Some years ago, Oracle also made a move into the enterprise computing hardware business by purchasing Sun Microsystems. But the intension then was to offer companies in-house computing servers, which now obviously is no longer a fitting business strategy. However, if Oracle could leverage its acquired hardware-making capability to build its own cloud platform to attract companies that prefer to outsource their computing functions, it should be able to once and for all solve the issue of how to continually get its software into the hands of corporate clients in today's changing enterprise computing environment.
Short of such a conviction by the company, Oracle stock probably will continue to go sideways as what it did in the last three years. While the company may be able to maintain its sales level or even manage some small increases, it unlikely will have a breakthrough performance if it leaves its cloud constraint unaddressed and lets it affect negatively the deliveries of its software to corporate users. However, investors will reward Oracle stock if the company can demonstrate the ability to fully adapt to the changing cloud environment in enterprise computing.
A quick comparison of the valuation between Oracle and Salesforce.com stocks may serve as a taleteller about investor outlook on future enterprise computing. While Oracle stock trades at about three times its equity book value, the same ratio is over 13 for the stock of Salesforce.com. Salesforce.com provides its software as a service solely over the Web and has had revenue growth on a consistent basis. Since Oracle still does certain software installation on clients' computers, it can only grow its business when it moves more towards offering services over the Web and then, may see increases in its stock price.
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.