This Tech Stock is a Good Cloud Computing Bet

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

In the modern days of technology, the term “cloud computing” has been spread widely. Businesses are putting a lot of efforts on improving productivity, cutting unnecessary costs and increasing the level of mobility as well as flexibility. Cloud computing might be the answer for all business sizes, from mega companies to small companies with only several people. Recently, Oracle (NYSE: ORCL) has been expanding their reach in the cloud computing field by purchasing Eloqua (NASDAQ: ELOQ) for $810 million. What does it mean for Oracle’s shareholders? Should investors be interested in Oracle now?

Decent Quarter With Strong Cloud Computing Growth

Just a few days ago, Oracle announced its Q2 2013 earnings results. The second quarter experienced slightly increasing revenue -- $9.1 billion, 3% higher than that in the last year. The majority of Oracle’s revenue was generated by its Software Business Segment, including new software licenses and cloud software subscriptions, with growth of 17% to $2.4 billion, and software license updates and product support, with 7% year-over-year growth to $4.3 billion. Net income for the second quarter was $2.6 billion, 18% higher than the net income of the same quarter last year.

The diluted EPS has grown more than 23% from $.043 Q2 2012 to $0.53 in Q2 2013. Trailing twelve months, Oracle has generated more than $13.5 billion in operating cash flow, with $10.2 billion returned to Oracle’s shareholders via 350 million shares bought back over the last 12 months. Quite a decent quarter!

Acquiring to Expand

Mark Hurd, the company’s president, has commented on the potential of the company’s cloud business: “Applications, middleware and database all had double-digit growth in new software license and cloud subscriptions, with applications leading the pack with growth of over 30%. Our cloud offering of HCM, CRM and ERP applications plus the Oracle database and Java platform services is the strongest and most complete in the industry. Already approaching a one billion dollar run rate, our Cloud business will become much bigger over time.”

Indeed, Oracle has been growing its cloud computing services via acquisition. It acquired RightNow Technologies and Taleo to expand the cloud computing software to help customers to access online. The recent acquisition of Eloqua would boost its expansion further. Eloqua is the provider of web-based on-demand revenue performance management for businesses to improve revenue predictability by managing marketing and sales initiatives, with around 1,200 customers on its cloud-based marketing software.

Pay a High Price, But Is it Worth it?

This acquisition happened right after a similar move taken by IBM (NYSE: IBM) when it acquired Kenexa, the cloud-based software for managing talent and recruitment, for $1.3 billion in cash. Both of the deals seem a little bit overpaid, as Eloqua was valued at 9x P/S and Kenexa was valued at 4x sales.

Ken Allen, managing director of The Blackstone Group, said, “There is inherent synergy between the CRM system-of-record (and the data therein) and Marketing Automation; by making this move Oracle can now offer another tool to marketers that already house their data on the Oracle platform.” 

Indeed, the acquisition of marketing automation might give Oracle more advantage in the field that Salesforce.com (NYSE: CRM) has been dominating. Karl Keirstead, BMO Capital Markets analyst, has said that the deal was a “modest net negative for Salesforce.com.” He also thought that around 50% or more of total customers of Eloqua were also the customers of Salesforce.com. That would be quite advantageous for Oracle, as the company has been trying to keep its Sieble software’s customers from being taken away by Salesforce.com.

Foolish Bottom Line

Oracle is way more financially flexible than Salesforce.com. It currently had nearly $16 billion in cash and nearly $17.8 billion in marketable securities, whereas Salesforce.com had only $605 million in total cash and short-term investments. Thus, Oracle had more options to shop for cloud-computing companies. With forward P/E of 11.4x, 0.8x PEG and 0.7% dividend yield, Oracle might be a safe bet for long-term investors on the cloud-computing future.  

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle and has the following options: long JAN 2013 $50.00 puts on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com and International Business Machines. 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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