Should You Buy Oracle on This Dip?

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

On June 21, shares of Oracle (NYSE: ORCLNASDAQ: ORCL)),  the largest maker of database software, fell to a seven-month low after sales missed estimates for a second straight quarter, as customers shifted spending to competitors’ Web-based business tools. Analysts were expecting fourth quarter sales of $11.1 billion, versus the company's actual sales of $11 billion. In response, shares slumped 9.3% on heavy volume.

Why, then, should you be bullish on this stock? Here's my take. 

The partnership

The much- discussed partnership with Microsoft Corporation (NASDAQ: MSFT) is a major evolution in cloud computing, sending both customers and profits to Microsoft and Oracle. This is a "must have" for Oracle which keeps losing customers on the cloud front. In this partnership, customers can now run Oracle software on Windows Azure platforms as well as on the Microsoft Server Hyper-V. Oracle Database, Oracle Java, Oracle WebLogic Service, and Oracle Linux will now also be available to Windows Azure customers. This alliance of rivals can be regarded as a response to the dominant role that International Business Machine (NYSE: IBM) and Amazon.com are playing in the cloud space. Amazon Web Services (AWS), for example, is indisputably the largest cloud service provider by far, and by all accounts. AWS took in around 35% of the $1.2 billion spent globally on infrastructure-as-a-service clouds in Q4 2012, with IBM coming in at a distant second with 5%. 

And that's not the only partnership for Oracle. Recently, Salesforce.com and Oracle announced a comprehensive nine-year partnership to integrate their clouds, encompassing all three tiers of cloud computing: Applications, Platform and Infrastructure. Salesforce.com plans to standardize on the Oracle Linux operating system, Exadata engineered systems, the Oracle Database, and Java Middleware Platform. Oracle plans to integrate salesforce.com with Oracle’s Fusion HCM and Financial Cloud, and provide the core technology to power salesforce.com's applications and platform.

Most interestingly, Oracle's hardware business may be turning a corner. Ellison said Oracle’s Exadata computers and other high-end “engineered systems” now account for more than a third of the company’s total hardware business. Oracle sold more than 1,200 such systems in the fourth quarter. This is interesting because the overall trend in hardware is down, not up. That's precisely the reason why IBM has made its famous turnaround from a hardware company to an IT leader. Software and services represented only 65% of IBM's profit in 2000. It's up to 84% today. This is well reflected in its operating margins that improved from 10% 6 years ago, to 22% today. That's a direct result of the move to software. Oracle and Microsoft are software- based companies. Operating margins of Oracle and Microsoft are 38% and 35%, respectively. 

Shareholder friendly

Oracle doubled its dividend to 12 cents a year. In addition, the board also authorized Oracle to buy back up to $12 billion worth of common stock under the company's existing share repurchasing program. Something that Oracle has been doing intensively since 2011. It represents s a clear commitment from executives to shareholders, and it shows that they also believe shares are currently undervalued. 

Just to get a feel for the numbers, between 1999 and 2011 - the company spent a total of $32 billion on share repurchases. Now, a single share repurchase program amounts to more than a third of the total company's repurchases, combined. Oracle has never purchased so much of its own stock in its history.

By boosting is dividend payouts, Oracle is finally marching down the aisle with other big tech names like Microsoft and IBM which upped their dividend payouts by 15% and 12%, respectively. That's a proper allocation for some that cash pile that these big tech names have been sitting on. In addition, Both Microsoft and IBM are highly committed to share buyback programs. In fiscal 2012 alone, Microsoft and IBM spent $3.1 billion and $10.45 billion on share buybacks, respectively. In that sense, Oracle's recent move towards more aggressive buybacks aligns it with other shareholder friendly tech giants. 

Some downside

Growth is slowing at Oracle. Revenue from new licenses and cloud subscriptions in the current fiscal first quarter will range from unchanged to an 8% increase from a year ago. That's because the shift in corporate-computing habits is making it harder for Oracle to compete with cloud providers. Another negative metric is the company's total asset ratio. The total asset turnover ratio measures the company's ability to generate revenue with a given level of assets. Oracle's total asset turnover ratio is trending lower; which suggests that Oracle is becoming less efficient with its capital.

My Foolish conclusion

I firmly believe that what we are witnessing here is a typical market overreaction over Oracle's report. Oracle, with its cash flow generation, upcoming partnerships, and aggressive buyback program is well situated to grab a portion of its rivals' business. This, in turn, creates a great opportunity to grab some more shares at even more attractive prices.

 


Shmulik Karpf has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines., Microsoft, 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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