Weak Revenue Growth, But Still A Buy!

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

While many analysts have soured on Oracle (NYSE: ORCL), citing its prolonged dip in revenue growth, I still believe that its stock is a buy. I believe that its strengths outweigh its shrinking top line. Its revenue growth rate has been on alarming free-fall as detailed below.

<img src="/media/images/user_13010/11_2_large.jpg" />

Source: Wiki invest

The chart offers a clearer picture of the notable dip in quarterly revenue growth rate from fiscal 2010 through until the latest earnings report. By using this weak growth rate as a key factor to underlie my argument, one prominent question begs an answer: why advocate for a stock that is latched on a downward revenue spiral?

Well, for starters, Oracle is well aware of its alarming top line. In the same breath, the database developer has tightened up its marketing and sales expenses. As such, reduced sales have not gnawed into its bottom line, as noted in its earnings report toward the fall of September.

Apart from that, I am inclined to believe that Oracle’s stock appeals to the immediate needs of investors. Although investors are thrilled by high growth prospects, material benefits tend to assume a higher priority. With that in mind, Oracle has gone ahead and posted incredible earnings per share, improving 13.9 percent on a year-over-year basis. This improvement, coupled with prior positive increments to its EPS, signals a trend that has since been traced back to Oracle. Apparently, the tech bigwig has reported increases on earnings per share for the past two years. Moreover, the market expects an improvement in earnings this fiscal year, estimating an EPS of $2.66 vs. the previous $1.97.

Positive progress in EPS adds to other positive indicators like increased net income and notable gains on Return on Equity, signaling a bullish stance. This improves confidence levels in investors and contributes to a positive outlook on the stock.

Inking deals in potent markets

Oracle is also making significant inroads into potent markets. This outweighs the negative growth prospects and offers hope for the long haul.

Back in February, Oracle reportedly agreed to a $1.9 billion deal to acquire Taleo, hiring software used by organizations to manage human resources. The February deal is a reflection of the ongoing trend that has pushed many tech heavyweights into the ‘algorithm hiring’ market. Notable names like IBM (NYSE: IBM), which is also a close competitor to Oracle, have also made entries into this market. IBM in particular was noted to have agreed to a $1.3 billion deal to acquire Kenexa, a company that seemingly offers the same package as Taleo.

Just to bring you up to speed, the fast growing algorithm market allows employers to use data driven programs to hire and basically manage their human resources.

Oracle’s entry into this potent market brightens its prospects as this particular service is likely to appeal to its own enterprise market. It not only allows enterprises to manage their human resource but it also enhances cost optimization and contributes to the nourishing of employees’ careers.

By also inking a map deal with Nokia (NYSE: NOK), Oracle jumps into Nokia’s bandwagon of deals and increases its options in the promising smartphone market. Unlike Hewlett Packard, which is currently recording one of the most bearish performances in the industry, Oracle is making significant inroads in other markets even as the once potent PC market continues to shrink. Nokia seems to be a good bet at the moment. Its turnaround story is taking positive turns amid increased popularity of its new Lumia 920 smartphone. This explains why Microsoft has shifted most of its efforts towards Nokia’s new range of smartphones.

Working the Nokia angle will greatly benefit Oracle. Already, Nokia’s map has the untapped potential of gnawing into Apple’s map service. The latter’s service has been on the receiving end of scrutiny following blatant flaws like wrong addresses and misspelled streets. As such, Nokia – and in connection Oracle – have the edge. Similarly, Oracle’s enterprise market is likely to take the idea of maps positively as the need to communicate more definitely continues to swell.

In conclusion, I believe that Oracle’s strategy is spot on. It is doing all it can to sustain itself in light of its weak revenue growth and simultaneously narrowing in on ventures that can materially improve its long term outlook. It is a definite buy.

muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, and Microsoft. Motley Fool newsletter services recommend Apple. 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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