Oracle: Why $40 Is Not Out Of The Question

| About: Oracle Corporation (ORCL)

Database giant Oracle (NYSE:ORCL) is a screaming "buy" at the moment because the stock remains significantly undervalued and underappreciated. It seems Wall Street is still unable to fully forgive the company for its recent earnings miss. Sometimes if you pay attention well enough, you can anticipate when such events are going to occur and brace for the impact.

I see this quite often and can only describe it as the market's tendency of overreacting to hiccups. Value investors love such an event and often use it as an invitation to bargain hunt. The fact of the matter is, for every blowout quarter from a company such as Apple (NASDAQ:AAPL) there are indeed earnings misses from various other companies. But when the disappointment comes from a company such as Oracle, I call it minor malfunction - simply put, the company had not missed in 10 years.

The quarter that was

In the quarter ending November 30, the company reported a profit of 54 cents per share while analysts were projecting profits of 57 cents. The bright side of the report was that new software sales rose slightly - 2 percent year-over-year to $2 billion. Management also added that it expects hard revenue declines of 5 and 15 percent while also projecting new software sales growth of flat to 10 percent - another disappointment as analysts were forecasting growth of 7 percent.

As a long time shareholder, I can tell you that the company has had better reports. But one thing that it has also had is good sound management. Warren Buffett once said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

If you subscribe to this belief as I do, you will be hard pressed these days to find any management team who deserves more credit than the one at Oracle. Because unlike many once prominent tech giants such as Research in Motion (RIMM) and AOL (NYSE:AOL) that once captured market niches only to see them slip away to more agile rivals, Oracle has been able to maintain its lead in enterprise database and corporate efficiency. This is despite continuous assaults from Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ) and Cisco (NASDAQ:CSCO). I think for this reason, the company continues to be underappreciated.

Managing its future

I think Wall Street is also overlooking the fact that Oracle had already anticipated weakness in certain segments of its business and has positioned itself for the technological shift within the cloud that will allow it to maintain its dominance in the corporate enterprise sector. Yet, it would seem that the market had developed a bit of anxiety over its earnings and the likelihood that a rebound in IT spending was less possible in 2012. But for Oracle, other streams of revenue and growth have always been par for the course. We have seen recent evidence of this strategy when it acquired RightNow, the cloud-based customer experience suite designed to help organizations deliver customer experiences across the web and social networks.

There is an accepted swap or trade-off when it comes to investing in certain companies or certain sizes. Particularly in technology, the bigger the company, the less enthusiastic you should be about their growth prospect. Typically, bigger companies tend to be less volatile; they offer investors more security, and more often than not, they apply more conventional philosophies towards spending, thus all but eliminating their ability for speedier growth (if at all).

To date, Oracle's management has shown that they are the exception and not the rule to this idea. While that sentiment can be arguably applied to companies such as the aforementioned Microsoft, Oracle chose to decline the invitation.


With the stock now trading at just under $29 after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation between $35 and $40 even on the most conservative assumptions. The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications.

Disclosure: I am long MSFT, CSCO, ORCL.

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