Can Oracle Keep its Edge?

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

After their most recent earnings report, voices have emerged across the web questioning whether or not Oracle (NYSE: ORCL) is able to remain competitive in the current environment. Oracle is the world’s number one producer of enterprise software and is also active in a number of other markets. This diversification is one of the company’s strengths, but as the report highlighted, it brings certain dangers with it as well. Is it worth getting into this tech giant at the moment?

Earnings

In the last release on FQ1, revenue missed by about 240 million dollars. EPS was in line at $0.53 which was mostly buoyed by 3.1 billion dollars of share repurchases as well as cost control measures. Software licenses were up 7% YoY, but the big letdown was its hardware division once again, with revenue down 24% YoY. At the moment, their cloud computing division is probably the most promising for future growth with revenue expected to be up between 5 and 15%.

Fundamental Metrics

Although these earnings are far from stellar, the company still looks alright based on fundamental valuations. The stock trades at about 16x earnings, compared to the 25x industry average. The price to book is about 3.3 which is also significantly lower than the industry average of 5.1. SAP Ag (NYSE: SAP), a German tech company which competes with Oracle in the production of data analysis tools and has acquired quite a decent market share, trades at 19.8x earnings with a price to book of 5.1. Oracle has an excellent operating margin of 37.9% and a reasonable LT debt to equity ratio of 31. Based on these valuations, Oracle isn’t very expensive at the moment.

Oracle's 5-year price and P/E:

<img src="http://media.ycharts.com/charts/aed137ee025f00f0f91cb0cb216fab45.png" />

ORCL data by YCharts

Strategy and Competition

Oracle’s size and the diversification of its product portfolio have allowed it for a long time to remain competitive in various segments, such as cloud computing, server software, and data analysis tools. However, increasing competition from other companies is putting pressure on the firm to remain creative in coming up with new products and improving its existing product line. The firm has indeed changed its strategy in recent years, now focusing on smaller acquisitions and cost cutting as a means of keeping the EPS intact.

Because the company is active in so many markets, it competes with giants such as Microsoft (NASDAQ: MSFT), which also has a thoroughly diversified product portfolio. Microsoft mainly competes with Oracle in the Enterprise Software division, where it has a fairly decent market share. Because Microsoft doesn't produce hardware, it does not represent a threat to Oracle's Enterprise Hardware division, represented by its acquisition of Sun Microsystems. Microsoft’s valuation is comparable to that of Oracle at the moment, with a similar operating margin as well. On the other hand, Microsoft’s 3% dividend yield is substantially higher than Oracle’s 0.74%. 

Bottom Line

Because Oracle these days has to deal with increasing competition in all of its core segments, the question remains whether or not Oracle can step up to bat and continue to improve earnings and shareholder returns. The company’s reliance on share buybacks in the last report is somewhat worrying, as well as its declining revenues especially in the hardware division. While the company’s valuation is quite attractive at the moment, investors would do well to wait and see how the company fares in the months to come. To my mind, the company would be a more attractive buy some ways off the recent highs it has been clocking.

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DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft 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.If you have questions about this post or the Fool’s blog network, click here for information.

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