Oracle and NetSuite Team Up Against IBM

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some of the biggest trends in companies right now are the growth of earnings through the use of strategic partnerships. At least that’s what Oracle (NYSE: ORCL) and NetSuite (NYSE: N) are up to. In this strategic alliance, both Oracle and NetSuite will increase their capabilities to serve medium-sized businesses.

Partnerships an emerging trend

Source: PricewaterhouseCoopers

In 2013, 22% of global CEOs believed that mergers and acquisitions, joint ventures, or strategic alliances would be their companies' primary growth drivers. Based on the survey result, investors should look closely at this joint venture between Oracle and NetSuite.

The alliance between the two companies is intended to increase the competitive advantage for its customers. The purpose is to integrate both human resources and finance systems within an organization. To be more specific, it would connect the financials, sales, services, and fulfillment information for a business. This way the company in question can better address all of its internal needs and have better control through the use of software. The hoped-for outcome is that by providing an all-in-one software solution to businesses, the two combined companies will be able to steal market share away from IBM (NYSE: IBM).

How to position

The new developments are certainly likely to put pressure on IBM as all three companies are becoming increasingly dependent on software and services in order to generate revenue growth. Analysts on a consensus basis anticipate Oracle to grow its sales by 4.90% in 2013 and 5.2% in 2014. This sluggish sales growth is why Oracle is pursuing a partnership with NetSuite.

NetSuite, on the other hand, is projected to grow its sales by 32% in 2013 and 27.40% in 2014. To be fair, NetSuite is a much smaller company so the cloud, cloud integration, and partnerships like these will have a more favorable impact on the smaller company. NetSuite currently has a $6.8 billion market capitalization and could be in the sweet spot for growth-oriented investors. The company is projected to grow its earnings by 28.20% per year over the next five years. Assuming that’s correct, NetSuite could be a compelling investment opportunity.

What about IBM?

Don’t worry about IBM, though, it has a wide array of services. I would try listing all of them, but I figure I’d just screenshot the page.

Source: IBM

The company has too many solutions. Just kidding. The point is that while Oracle and Net Suite have been eagerly pursuing partnerships, IBM keeps adding to its stack of patents, technology, and services. You would be surprised at the sheer amount of products and ideas that IBM has in its core area of business.

You could have IBM analyze anything for you, whether it is user statistics, shopping experience indexing, finding out when you should put your products on sale, and more. Data is essential to the world, and managing everything from procurement, human resources, and supply chains is possible over at IBM. IBM is the handyman to any company’s problem because it provides a mix of consultation, big data gathering, and software. The company's unique software solutions can help a company manage, collect, or analyze data to find trends that can help it improve.

The company has plans of growing its earnings per share from $14.50 to $20 per share by 2015. It plans to do this through a mix of share buybacks, cost cutting, acquisitions, and modest revenue growth.

Conclusion

I think that Oracle, while a decent investment opportunity, should be passed up for in favor of IBM. Of the three companies, however, NetSuite will grow the fastest as it is the smallest. IBM and Oracle will remain lopsided growth vehicles for a while because of declining systems and hardware sales. The decline should be stemmed eventually, however, as IBM and Oracle continue to emphasize software and services.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Netsuite. The Motley Fool owns shares of International Business Machines. and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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