The Other Big Technology Shift

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While increasing mobile Internet use is a very public technology shift, the other big change is the corporate swing toward cloud computing.

It's taken the wind out of the sails at Oracle (NYSE: ORCL) as upstarts like (NYSE: CRM) and Workday (NYSE: WDAY) have been more nimble. Don't count the giant out, however.

A Rough Quarter

Oracle's results missed Wall Street estimates for the second quarter in a row, prompting the shares to sell off sharply and leaving them down for the year despite the broader market's advance. CEO Larry Ellison noted that weak or weakening economies around the world were a major reason for the shortfall, but Wall Street appears more concerned that Oracle is a lumbering giant moving too slowly into new markets. That's not an unreasonable assessment.

Oracle's foundation is on back office hardware and software pairings in the business world. That's been a great business, but the model is decidedly old today as more and more companies get comfortable with the software as a service (SAAS) model. Essentially, Oracle is selling companies their own systems, often at great expense. SAAS leverages the connectivity of the Internet to allow customers to “rent” their computer systems on a monthly basis.

The worst part is that cloud computing makes the rental fee pretty low so long as you don't require too much individualization. It's an offer that is getting increasingly difficult to compete with and helps explain at least a portion of both the lackluster recent performance and the company's less than impressive outlook.

Doing it in the Cloud and Workday are two of the upstarts that have been gaining ground with their cloud offerings.

Salesforce started out selling customer relationship management tools over the Internet. Today, it has four offerings, Sales Cloud, Service Cloud, Marketing Cloud, and the Salesforce Platform. Effectively, these software as a service offerings can replace key computer systems that would historically have been provided by a company like Oracle.

Sales at Salesforce have exploded over the past decade, going from around $100 million to over $3 billion last year. Growth spending, however, has left earnings in negative territory over the last two years. While that's not an unheard of trend, the company had been making money for years leading up to the red ink. Moreover, it plans to spend around $2.5 billion in cash to buy ExactTarget, its largest acquisition yet.

While continued expansion via acquisition is important, it increases the risks at a money losing company trading near all time highs. Aggressive growth investors should take a look, but more conservative types should probably sit on the sidelines.

Working it

Workday is a money-losing cloud company. It is a relatively new public company, so there is little information available. Revenues in the recently ended fiscal year were about $275 million. While some might see this and project out growth like that seen at Salesforce, that's a high-risk bet for an upstart.

Workday offers such services as payroll, financial management, time tracking, procurement, and employee expense management. These are vital back office functions that take up vast amounts of computer time, so a shift into the cloud makes sense. The company has notable potential, particularly in the small- and mid-sized business arena, but there is no guarantee of success.

With around $800 million in cash, it has plenty of time to push its operations into the black. However, losing $1.50 a share, as it did in fiscal 2013, isn't a trend that can last for very long. With the shares up around 30% since their initial public offering, only aggressive investors and those expecting an acquisition should step in here. On a positive note, it only lost $0.20 a share in the recently ended quarter.

Don't Count Ellison Out

Workday and Salesforce are two of the bigger competitors to Oracle, but they are both tiny in comparison. While that means they offer investors vast growth potential in the near term, it doesn't mean that Oracle is going out of business any time soon. While aggressive investors might find the pair appealing, more conservative investors should probably stick the struggling giant.

For example, although Salesforce and Oracle compete with each other, they have also agreed to partner up with a nine-year agreement. Oracle will basically be providing the back end to Salesforce's front end. The deal allows Oracle to benefit from an upstart competitor's growth instead of just losing out on direct sales. Salesforce, meanwhile, gets to spend more time creating services and selling them, which is where it excels.

Oracle recently inked a deal with Microsoft, too. This deal should allow customers to keep using Oracle software even if they decide to shift to Microsoft's cloud services. By making its enemies its friends, Oracle is seemingly admitting it can't do everything. However, it is also setting itself up to be a part of the solution no matter who gets the cloud sale. That's a smart move.

A Good Price 

Although Oracle hasn't been performing up to expectations of late, its top and bottom lines have been growing solidly for a decade, including right through the deep 2007 to 2009 recession. Moreover, it initiated a dividend a few years ago and just announced plans to double the payment.

With a Price/Earnings (P/E) multiple of around 14, the company is trading cheaply compared to its history and the money-losing cloud stocks. And Oracle is already pushing into the cloud via acquisition and partnerships like the one with Salesforce. And it has about $15 billion more cash than it has debt to keep funding its efforts. That could make now a good time to pick up this giant as it slowly turns the ship in a new direction.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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