The Significant Drop of This Tech Giant Creates a Buying Opportunity

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

There is blood on the street again as investors worry about the Fed’s plan to reduce its stimulus. The market experienced its worst day of 2013 so far as the Dow Jones declined by 2.3%, or nearly 354 points. The S&P 500 dropped by 2.5% to 1,558.19. Along with the general market decline, Oracle’s (NYSE: ORCL) share price took the pain by decreasing nearly 9% in after hours trading, dropping to only $30.30 per share. Should we consider the recent share price drop a good investment opportunity? Let’s find out.

Oracle missed sales estimates, raised its dividends

The drop of Oracle’s share price might be due to the weak sales reported in its fourth quarter earnings results. While analysts expected that Oracle could generate $11.12 billion in sales, its revenue fell short of expectations at $10.95 billion. Sales stayed flat compared to the fourth quarter last year. Oracle experienced decent growth of 4% in its software revenue, but at the same time its hardware revenue declined by as much as 9%. Despite the flat sales, Oracle managed to grow its net income by 10%, from $3.45 billion in the fourth quarter of last year to more than $3.8 billion, or $0.80 per share.

What made investors interested was the announcement that Oracle was doubling its quarterly cash dividend from the current dividend of $0.06 per share to $0.12 per share. The increased dividend would be paid on August 2 to shareholders of record on July 12. Moreover, the company also authorized an additional $12 billion for share repurchases under its existing share buyback program. Safra Catz, the company’s President and CFO, commented that the increase in dividend payment was due to a consistent higher margin, higher cash flow and cash balance.

Cloud expansion via acquisitions

Oracle, along with its peers such as IBM (NYSE: IBM) and Salesforce (NYSE: CRM), has been expanding its footprint in cloud services. At the end of 2012, the company bought Eloqua for around $871 million to enhance its Customer Experience Cloud offering. Eloqua provides web-based on-demand revenue performance management for better revenue predictability via marketing and sales initiatives management.

IBM also made an aggressive move when spending around $2 billion to acquire a cloud computing company, SoftLayer. SoftLayer was the biggest privately-held provider of cloud computing infrastructure with 13 data centers and around 21,000 customers. The acquisition could enhance IBM’s capability to integrate both public and private cloud offerings for its clients. Erich Clementi, the Senior VP of IBM Global Technology Services said:

With SoftLayer, IBM will accelerate the build-out of our public cloud infrastructure to give clients the broadest choice of cloud offerings to drive business innovation.

Looking forward, IBM expects to generate as much as $7 billion in annual cloud revenue by the end of 2015.

Salesforce is also quite active in cloud service acquisition. It has recently acquired ExactTarget, the cloud-based digital marketing company, for around $2.5 billion in cash. Salesforce paid a high premium, equaling 52% to the company’s pre-offer trading price. According to Salesforce, the acquisition will create a marketing platform across different channels including email, social, mobile and the web. As ExactTarget has not generated any profits for the past three years, the acquisition will reduce Salesforce’s full-year 2014 non-GAAP earnings per share to a range of $0.31 to $0.33. The acquisition price seems high at 7.4 times its revenue, higher than the current price-to-sales valuation of Salesforce.

Valuation

At around $37 per share, the market values Salesforce at more than 6.8 times its sales, but as high as 300 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization); this makes its valuation the highest of the three companies. IBM trades at around $197 per share, with a total market cap of $218.8 billion. The market values IBM at 9.3 times its trailing EBITDA and 2.17 times its sales. Oracle has the lowest EBITDA multiple among the three. It trades at around $30 per share, with a total market cap of more than $142.70 billion. The market values Oracle at only 7.67 times its trailing EBITDA and 3.9 times its sales.

My Foolish take

I like both IBM and Oracle; they have global leading positions, have moved aggressively into cloud service offerings and feature reasonable valuations. Oracle, with its recent drop in its share price, represents a good investment opportunity for long-term shareholders. Salesforce, on the other hand, seems quite richly valued at its current trading price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. 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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