Have You Consulted the Oracle?

Dan 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) has had a flat year, to say the least. When expectations aren't met, investor confidence wanes and the share price takes a hit. Oracle knows this all too well.

Bad omens

For 4Q13, revenue was up by an unimpressive 1% in comparison to the previous year's quarter - equivalent to earnings of $0.80 per share. This was not enough to meet analyst expectations of $0.87 per share, and Oracle suffered a 9% drop in share price as a result.

Oracle's strategy is shifting toward a cloud-based business model. Unfortunately, this means it is now playing catch-up with competitors to secure a foothold in the cloud, indicative of its habit to respond to market changes slowly. Looking back at 2008, its fairly obvious why this is the case. At the time, "the cloud," in its current iteration, was an idea that CEO, Larry Ellison, felt carried little merit. He described it as "nonsensical," stating, "I have no idea what anyone is talking about." Ellison has been anything but an oracle on the topic, with some cloud-based vendors expanding recently at a growth rate of more than 90% per year.

In addition, since Oracle's acquisition of Sun Microsystems in 2010, hardware sales have been on a consistent decline. The slump has not eased, with Oracle reporting a 23% decline in hardware revenue for 3Q13 and a year-over-year overall hardware loss of 13% reported in 4Q13. Oracle has also suffered damage from the inside, with a leaked instant messaging conversation showing Oracle executives  bashing the Sun Microsystems acquisition. This caused a large speculative sell-off of Oracle shares.

The competitor space

Oracle's nemesis, SAP (NYSE: SAP), is roaring ahead, with cloud subscriptions growing 166% over the previous year's total to approximately $238 million. SAP had more good news to share in its 2Q13 report, with software-related services revenue increasing by 10% overall - in stark contrast to Oracle's mediocre performance. SAP's figures indicate its share of the cloud is increasing and that the company is a decent growth prospect.

Competitors in the virtualization market, companies like VMware (NYSE: VMW), have reported year-over-year revenue growth of 11%, as well as a year-over-year operating income increase of 28%. VMware views the cloud as one of its core markets and has been busy unveiling new products that will power its Q3 and Q4 earnings - most notably its infrastructure-as-a-service solution, "vCloud Hybrid Service," a solution designed to give customers a seamless virtualization experience.

Furthermore, in May, VMware announced a partnership with SAP to deliver solutions such as SAP HANA, a direct competitor to Oracle's upcoming 12c database offering, to customers via vCloud.

Scrying Oracle's future

So, what's in Oracles future? Some may argue that Larry Ellison has lost his touch, but I don't think it's as clear cut as that. The future outlook isn't as dreary as one might assume, given the financial comparisons I have drawn. Here's why:

Proper attention is finally being given to the virtualization and cloud computing markets. Oracle's ongoing acquisition of Xsigo has proved instrumental to its new foray into virtualization solutions, with Xsigo technology being implemented into Oracle's upcoming cloud system. Oracle is planning to reveal this new system in mid-August, claiming the product will allow customers to "install and deploy virtual infrastructure in just hours." In addition, Oracle is getting its act together (somewhat) in the relationship department by forging partnerships with long-time competitors like Microsoft. In this deal, Microsoft's "Azure Cloud" platform will feature Oracle's Java and database software, mirroring the partnership between SAP and VMware.

By establishing partnerships like this, Oracle is setting itself up for a healthier long-term position in order to compete for a market share of the cloud. The issue here is it may be too little too late. Oracle has, again, been slow to respond, with strategic partnerships like these only beginning to form months after competitors have made deals.

Oracle does have one glaring advantage over SAP, however. In SAP's model, partners develop a large amount of the application ecosystem surrounding new products such as HANA. The problem is many of SAP's partners don't specialize in application development. Oracle's approach differs, building upon years of in-house product development.

VMware doesn't suffer from SAP's reliance on partners either, with the majority of application design done in-house. What it lacks in relative terms is industry experience, which is only relevant to Oracle's more traditional markets such as database systems. VMware's strategic partnership with SAP takes care of this issue by providing SAP's HANA through its cloud platform. As a result, VMware is well-positioned against any upcoming Oracle offerings in the cloud space. VMware certainly looks to have a bright future in this respect, provided it can maintain healthy relations with its business partners.

Having consulted the oracle

Oracle's future is somewhat clouded. The company has a wealth of experience and technical know-how in a variety of software offerings, which more agile competitors like VMware lack or will find hard to match in the future. VMware has hedged against such risks via the aforementioned partnership with SAP. Oracle's seemingly consistent inability to react quickly, combined with several questionable acquisitions, has spelled decline and missed opportunities for the technology giant. Looking long-term, I would hold off on Oracle for the moment. Oracle needs to prove to would-be investors that it can compete in the cloud, as none of the signals are overwhelmingly positive just yet.

The recent acquisition of Xsigo has proved more promising, but whether Oracle can deliver on its claims for its new visualization system is another story entirely. If Oracle can continue to leverage its knowledge-based resources and deliver a seamless, integrated cloud solution, as is the goal of said upcoming system, Oracle will have the capacity to snag a significant portion of the cloud for itself. SAP and VMware are much better-positioned to take advantage of demand for cloud computing at this stage.

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Dan Sayers has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of Oracle. and VMware. 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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