Kicking the Competition's SaaS

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

Oracle (NYSE: ORCL) appears to be presenting investors with quite the buying opportunity, being down over 11% over the past month. The reason? Oracle's fiscal fourth-quarter results came in below expectations, once again disappointing investors. But is the bad news overblown? Quite possibly. 

Software-as-a-Service (SaaS) is all the rage these days. Adobe is making the move, transitioning its services to the cloud, and Oracle acquired a number of cloud companies in 2012, including RightNow for $1.5 billion and Taleo for $1.9 billion. 

Oracle is in the process of moving more of its revenue reliance over to the Software-as-a-Service (SaaS) business. Its cloud platform allows enterprises to shift data applications between the public and private cloud. This includes its newsiest release, Oracle Database 12c. Oracle has already been offering Fusion SaaS applications for almost two years, but the 12c offering is targeting customers consolidating databases in their private cloud. 

Oracle has partnered with NetSuite, which offers cloud based enterprise resource management services. NetSuite plans on integrating its services into Oracle's cloud-based human resource software. The integration should be a big positive that can help clients reduce sales cycles. 

Gartner believes that global spending on enterprise IT spending will reach $3.8 trillion in 2013. In particular, the research firm expects revenues from SaaS expected to grow from $14.5 billion in 2012 to $22.1 billion in 2015. 

So why is Oracle down so much over the past few weeks? 

License revenue growth last quarter was up only 2% year-over-year, at the very low end of its 1% to 11% expectations. This comes after weakness was greater than expected in Brazil. But on the positive front, hardware systems revenue was down only 12%, compared to the guidance of down 12% to 22%. 

Oracle expects that hardware could see positive revenue growth in fiscal 1Q 2014. Meanwhile, SaaS related revenues were up 50% year over year. I believe the sell-off is overdone and the stock's current trading range could be a solid buying opportunity. 

Free cash flow for the quarter was an impressive $4.4 billion and cash on hand is at $32 billion. Meanwhile, debt was down over 6.5% to 18.5 billion. Oracle also took the opportunity to double its quarterly dividend to $0.12 per share, while authorizing an additional $12 billion in share buybacks. 

SAP (NYSE: SAP) is one of Oracle's chief competitors and it also happens to be one of the largest independent software vendors in the world; generating over 80% of revenues from SaaS offerings. 

SAP and Oracle are the leaders in the enterprise resource planning market. 

<img alt="" src="http://g.fool.com/editorial/images/54903/2013_erp_market_share_update__sap_solidifies_market_leadership_-_forbes_large.png" />

Both market leaders are continuing to make big pushes in the SaaS and cloud markets, which should help them fend of rising competition form smaller competitors. Analysts expect SAP to grow license revenues by 9% in 2013 thanks to the increased adoption of enterprise software. 

A couple of SAP's key drivers include the its in-memory database technology, HANA, which allows customers to run real-time database analysis. SAP also has plans to acquire Hybris, a Swiss-based enterprise commerce software company. This will help SAP further break into the the the Customer Relationship Management sector. 

Big Blue cloud

IBM (NYSE: IBM), aka Big Blue, is an IT services, software, computer hardware and research super-firm. IBM's global tech services accounts for over 55% of revenues and includes IT infrastructure, consulting, outsourcing and management services. The software segment accounts for 25% of revenues and focuses on operating systems software.

Revenues are expected to be flat in 2013 and then see modest 2.5% growth in 2014. IBM hopes to drive margin growth with a renewed focus on higher-margin software and service revenue streams. Along those lines, IBM made a big splash earlier this year with its $2 billion acquisition of SoftLayer. The move will help IBM offer customers private cloud access, in addition to its public cloud. 

The real beauty about IBM is its ability to return cash to shareholders. The tech giant has been levering up its balance sheet to buyback stock for over a decade; now its return on equity is upwards of 80%. The trend is expected to continue. Over the next five years, management expects to buy back shares worth $50 billion. 

PC weakness

One of the key tailwinds forcing a number of companies over to the SaaS market is weakness in PC sales. Microsoft gets some 50% of revenues from the PC industry. With an ever-slowing PC market demand, this can be a troublesome stat. As part of Microsoft's strategy, the tech company is looking to mobile and tablets.

Microsoft did enter a partnership with Oracle to make certain products inter-operable. The two companies will work together to solve technical issues, which should give Microsoft some exposure to customers focusing on the move to the cloud. Oracle has a similar deal with salesforce.com. 

Intel is seeking some of the biggest pressure related to weakness in the PC market. Intel dominates the microprocessor market, shipping over 80% of microprocessors globally. 

Revenue is expected to be flat in 2013, after a slight decline in 2012. Intel is under similar pressure as Microsoft, where the shift to mobile and tablets is putting serious pressure on the company's top line. However, Intel is turning to data center growth, which is a play on tech companies move to the cloud. 

Hedgie trade

Going into the second quarter, there were a total of 49 hedge funds long IBM. Warren Buffett of Berkshire Hathaway has the largest position among major investment funds, worth over $14 billion and making up 17% of Berkshire's 13F portfolio (check out Buffett's high upside picks).

Meanwhile, Oracle had 69 hedge funds owning the stock, where Eagle Capital Management had the largest position, worth $967 million and making up 5.8% of its 13F portfolio (see Eagle's top stock picks).

At the end of 1Q, Microsoft had some of the most hedge fund interest in the tech space, with 89 hedge funds long the stock. This includes Donald Yacktman's Yacktman Asset Management, with the largest position among hedge funds, worth $1.1 billion and comprising 6% of its 13F portfolio (check out Yacktman's newest picks).

The bottom line

With the exception of IBM and its ridiculous 80+% return on equity, Oracle is outshining its major peers on an ROE basis.

<img alt="" src="http://media.ycharts.com/charts/4e5b32fb74a499b80914f95586f69e69.png" />

Although Oracle's push to the cloud was a bit delayed, the company appears to be catching on quickly. I think SaaS will be a big contributor to earnings growth going forward, and I expect Oracle to continue throwing off cash to its shareholders. 

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Marshall Hargrave has no position in any stocks mentioned. 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!

blog comments powered by Disqus