Oracle: Deeply Undervalued At $27
Oracle (NYSE:ORCL) has been aggressive with acquisitions that offer research and development without a lot of risk. Oracle has been able to integrate new acquisitions to improve growth, revenues, but in the acquisition of Sun Microsystems the company bought itself a lawsuit. Oracle operates in a tough environment with competitors like Microsoft (MSFT), SAP AG (SAP), and IBM (IBM).
Oracle Can Attack with Java
Oracle is currently in a legal battle with Google (GOOG) regarding the fair use of Java technology. The lawsuit against Google by Oracle consists of three basic questions: Did Google violate copyright laws, did Google infringe on Java patents, and what, if any are the damages. Google admitted to using 37 Java APIs during the development of its Android operating system for smart phones. This month, the jury concluded that Google did infringe on Java API copyrights but it was also split on whether Google infringed on the copyrights under Fair Use. Initially, Judge William Alsup did not want a split decision, but after jurors came to a stalemate on whether Google proved "Fair Use" or not, Judge Alsup has accepted a partial verdict. The verdict has prompted Google to ask for a mistrial on "Fair Use". The trial is now in phase two and is on-going in the United States District Court, Northern District of California.
Outlook
I believe Oracle's stock is undervalued at $27 per share because of its competitive advantages in relational databases, Java technology, middleware and software. I also think there are reasons that make the stock unattractive too. First off, the hardware sales are not going quite as well as planned after the acquisition of Sun Microsystems. Second, the lawsuit has general investors worried. Third, software licenses are declining. It is expected to be reduced from 19% in 2011 to 7% in 2012. Fourth, is the European affect on two of three items above.
The lawsuit is key and thus I do not believe that now is the time to sell. I would rather hold shares for one more month and listen to year end earnings than sell right now. I am counting on Oracle's Larry Ellison, CEO, to provide a better strategy at the end of the month. I like the $30 billion in cash on hand, too. I think that with that much cash and Ellison's winning attitude, Oracle will buy another large company and get creative with how it can more efficiently allocate its acquiree's assets. This idea is not far fetched. Oracle has acquired giants like BEA, Peoplesoft, Sun Microsystems and numerous other companies in the past three years. Oracle has, in most cases, been able to integrate these acquired companies into a more robust product line to increase revenue and profits. I believe having that much cash on hand, it may be tempting for Ellison to shake up the technology world. This could be good for future growth and earnings.
Java licenses aside, I do think that Oracle will be able to be out front selling hardware and software licenses when Europe begins to grow again. But the whole technology sector has been hit or miss with earnings. Earnings have been sporadic and there is much fear in the market because of Europe. One caveat here is competition with SAP AG, based in Germany, on software sales and with IBM and Hewlett-Packard with hardware sales.
Oracle acquired other hardware companies like Ksplice and Pillar Data Systems recently to help keep competitive in the server and hardware business. With the recent slow down in Europe, which comprises 32% of Oracle's revenues, the overall outlook for tech spending in 2013 has been cautious as of late. But Oracle had a robust third quarter in software licenses, which is a good sign for future growth. Indeed, Oracle's Java revenues also come from maintenance fees, which continue to grow because of Oracle's strength in retaining existing clients.
Valuation
Oracle has a market cap of $134 billion and is number two in applications and business software sector. It had operating margins of 38% and profit margins of 26% in the latest quarter reported (February 2012). The third quarter also showed quarterly revenues of $37 billion, with quarterly revenue growth that was of 3% year over year. Gross profit was stated to be $27 billion for the third quarter. Oracle's fiscal year closes on May 31, 2012. Analysts have been steady on their recommendations. Most still believe Oracle is a market performer. Analysts' estimates, on average, call for earnings of $2.44 per share for the year. Oracle surprised the market with a 10% upside on earnings per share for the last quarter reported (February 2012).
I believe you should be buying the stock because there is support at the $24 per share level. I think a short squeeze could provide a nice lift to the stock after shares short increased from 24 million to 29 million in the period between March and April 2012. I reiterate the strength of support at $24 per share.
Overall, I believe that it is not a good idea to bet against Oracle and Larry Ellison. Ellison does not like when competitors start to close in on Oracle's business products and Oracle's best competitive edge is growing revenues with strategic acquisitions. I look forward to his next acquisition (and possibly concurrent intellectual property lawsuit) soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Comments (1)
- Oracle is by now a hodge podge of deeply siloed, software and hardware platforms;
- their core platform, the database platform, is now under intense competition from IBM, Microsoft and of late, SAP;
- they did a faux pas in estranging themselves from their long-term trojan horse against IBM, i.e. HP in the crudest manner thinkable, and this 'cursed war' continues, made all the more intense (and insane) by the hiring of Mr. Hurd;
- they have also bought themselves lots of FUD among long loyal clients, as their predatory moves to extract huge financial values from Java (and its derivatives) platform, which was a free, open platform during its Sun days. Coming after doing the same with Open SQL, memories will be hard to forget;
- Fusion, for all intents and purposes, seems to be DOA, as I do not understand why there is almost no news on this important future foundation of Oracle; and finally,
- Mr. Hurd may have successfully turned around a highly complex company like HP, but I submit that his job was made so much easier by the constant misfortunes and underminings (by her fellow HP directors then), but his trule mettle is yet to be proven at Oracle, a far simpler job, imo. The jury awaits, but I fear his 'fuse' is finally blown, as he will prove no match for the real challenges of making 'hay out of the Sun shine' acquisition.Alas,we don't have a long time to wait, I sincerely feel there are many win/win customer opportunities Oracle is leaving on the table, for the likes of IBM, SAP, ACN, Microsoft (and recently, even Amazon and Google), but that story is for another day. Meantime, they really should stop curing themselves of this 'follow the hurd' patent litigating disease.