Don't Miss These Disruptive Technology Stocks

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

The IT infrastructure industry is not only mature but also highly competitive. The development of various online services, social networks, and the abundant availability of digital media are presenting new demands on the database infrastructure rapidly. This is increasing the scope for a new approach towards warehousing this information. The three leaders of the database market, SAP AG (NYSE: SAP)International Business Machines (NYSE: IBM), and Oracle (NYSE: ORCL) are responding to these demands via innovation and breakthrough implementations.

These companies have always been trailblazers when it comes to deploying implementations surrounding disruptive technologies. Their solutions around Cloud computing, Big data, and Gamification will open various monetization opportunities in the upcoming years. One thing that I like about these stocks is that they continually offer investing opportunities. In contrast to those tech stocks which set off and never give an opportunity to invest in them until their growth curve is over, these tech stocks always open doors to the next upside drive.

Let's analyze these three leaders in detail.

SAP AG 

SAP HANA - A bellwether

HANA (High-Performance Analytic Appliance) will be the key driver of SAP's incremental growth. Through HANA, SAP has the ability to offer a next generation platform as well as individual components. Additionally, SAP will cross-sell HANA applications, further supporting revenue acceleration. Though most implementations are still in the pilot phase, my 4Q12 industry analysis indicates the first signs of enterprise deals emerging. HANA generated ~$524 million of license revenue in 2012 and 1000 customers to date (300 live implementations). While momentum has been strong in 2H12, I expect it to accelerate further into 2013. The primary driver of HANA sales will be the upgrading of existing business warehouse implementations inside the company's customer base.

Emerging market growth continues

SAP's focused investments in China ($2 billion until 2015) and the Middle East/Africa ($450 million announced in March 2012) should begin to pay off over the next three years. Forecasts suggest that sales of SAP in emerging markets should grow by around 20% (organic) in 2013. China is set to overtake Japan as the largest IT spending market in the Asia Pacific as a result of constant growth in consumer IT usage as well as the IT focus in the government. A big proportion of SAP's large deals pipeline is now comprised of the opportunities in the Chinese market. So I believe China can be in the top five nations to contribute heavily in license revenue for SAP in the next three years.

International Business Machines

For the first time in a decade the free cash flow of IBM fell below its revenue. The free cash flow was ~90% of its net income. The principal reason for this is that the increase in receivables has negatively impacted the cash flow. IBM's financing receivables were $30.9 billion in 2012, up $3.2 billion y/y and $5.1billion q/q in 4Q. This now forms around 30% of the last twelve months revenue, up from 26%-27% since 2008, which is the highest in the last five years. At the same time, there was a decline in customers with investment grade debt ratings from 65% to 60%. This appears due to a mix shift within growth markets, and a decline in credit ratings for existing mature market financing customers.

IBM's bad debt coverage is increasing with the deteriorating credit quality, which in turn will negatively impact the company's earnings. IBM's bad debt coverage of 4Q12 is 1.2% of its receivables. With ~$30 billion in receivables, even a 0.5% to 1% increase in IBM's debt coverage ratio would negatively affect its annual EPS by $0.11-$0.21. A small increase in the financing receivables and their credit quality indicates that the company is using captive financing to keep up its revenue growth. This was the reason why, despite the large uptick in the receivables last year, IBM's revenue was flat in 2012.

Therefore, it is important for an investor to keep an eye on these metrics as they may signal some early signs of stress in the company's growth. I am recommending a hold on this stock for now.

Oracle

I view the acquisition of Acme Packet (NASDAQ: APKT) as an extension of Oracle's growing vertical segment. This acquisition shall place Oracle in the next-generation of all- IP core networks, and across all three market segments--fixed-line, mobile, and enterprise. This deal suggests that Oracle is focused on software for next- generation network infrastructure. Acme's customers include 90 of the top service providers globally and 19 of the top 25 cable operators. This will provide a compelling cross-selling opportunity to Oracle in the coming years. My view on the deal is also rooted in Acme's 17% product revenue decline in 2012. The deal is still relatively small for Oracle, using just ~6% of its cash, which should not have any significant impact on its capital allocation and does not alter my positive view on the company's stock.

I expect growth over the next few years to be driven by mobile carrier investments in VoLTE (voice over LTE). With this acquisition, Oracle gains a footprint in IP session management and security products. Oracle has been slowly gaining prominence with the mobile operators in IT management and billing solutions. The next move shall be on converged charging, subscriber management, deep packet inspection (DPI), and application services. I think Oracle may seek to acquire other groups in the networking segment to boost its infrastructure offerings for the strategic data centre market.

The investor's take away

To sum up, I feel that Oracle and SAP provide opportunities for longer-term investments. SAP shall gain from the emerging markets growth, supported by HANA. Oracle will also be benefited from its investment in VoLTE and its future acquisition plans. On the other hand, I remain skeptical about IBM. It’s financing receivables growth and credit quality makes my view on this stock neutral.


madhudube has no position in any stocks mentioned. The Motley Fool recommends Acme Packet. 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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