A Software Powerhouse with Upside Potential

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Oracle (NYSE: ORCL) is an American-based computer technology corporation that manufactures and markets computer hardware systems and enterprise software products. It is a leading provider of database, business application software and hardware systems used by organizations all over the world. After Microsoft and IBM (NYSE: IBM), Oracle is the third largest software maker by revenue.

Fundamental analysis

Before deciding to invest in a company, first we have to see how well the company has performed. For the third quarter that ended in Feb. 2013, Oracle reported a decline in revenue of 1% year-over-year, reaching $9 billion. New software licenses and cloud software subscription revenues have fallen 2% to $2.3 billion. Software license updates and product support showed some improvement, with income up 7% to $4.3 billion from a year ago. Oracle generated $671 million from hardware systems, down from $869 million a year ago. The company’s revenue growth shrunk due to a decrease in hardware sales. IBM also faced a decline in its hardware sales in the first quarter of 2012, reporting a 17% drop in sales.

Oracle is facing several challenges from companies like Salesforce.com, which offers CRM products. For the current quarter, Oracle president Safra Catz expected revenue growth in the cloud and software license in the range of 1%-11%, whereas she estimated a fall in hardware revenue in the range of 12% to 22%.

Due to unsatisfactory third quarter earning results, Oracle's share price has fallen by nearly 7% in the last three months. Shares of Oracle’s main competitors IBM and SAP AG (NYSE: SAP), a German software company, have acted in the same way. Stock prices for both IBM and SAP fell almost 3.2% and 5.5% respectively.

In the first quarter of 2013, IBM reported revenue of $23.4 billion and a net income of $3 billion, down 20% and 48% respectively quarter-over-quarter. This decline in revenues resulted in the biggest single-day drop in share price that the company has had in a number of years. This shows that even Big Blue is not safe from the global recessionary environment. The recent decline in profitability and revenues is a cyclical trend and not a long-term factor, however. IBM is still among the best long-term technology bets, even after a bad quarter. 

In the first quarter of 2013, SAP reported revenue of $3.6 billion, up 8.3% quarter-over-quarter and an operating profit of $9 billion, up 8% over the previous quarter.

ERP market

SAP and Oracle are more focused on beating each other in the enterprise resource planning market, which surged 2.2% in 2012. SAP is still the global market leader with a 24.6% market share. In 2012, SAP generated $6 billion from ERP software, while Oracle and its 12.8% market share reported $3.12 billion in revenue. It is estimated that the CRM market could reach $7.9 billion in 2016, an annual growth of 15% from $3.9 billion in 2011.

The Cloud is good for Oracle

Oracle offers a cloud-based computing service known as Oracle Cloud. Salesforce.com has snatched a piece of cloud market share, but Oracle is still the dominant force in this space. Oracle has higher margins and greater resources to keep its current dominance in the market. This ability to spend more on R&D combined with a loyal customer base is Oracle’s biggest competitive advantage.

Oracle has recently acquired Nimbula, a provider of cloud infrastructure management software. Nimbula's technology helps organizations manage infrastructure resources to provide service, quality and availability. Nimbula's product is complementary to Oracle and is expected to be integrated with Oracle's cloud offerings. This investment is likely to complete in the first half of 2013.

 Final words

After Oracle’s third quarter results, its investors are showing signs of worry, but this weak quarter was a one time event. Considering the company’s greater margins, even as compared to giants like IBM, Oracle will continue to growth. With a reasonable price-to-earnings ratio, an analyst-estimated mean target price of $37.65 and a 10% upside on current levels, Oracle is good investment option in the software industry.

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Red Chip 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!

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