On Cloud Nine

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

I was reading this IT Spending Forecast by Gartner earlier this morning, and was intrigued with the strong growth potential it highlights for Cloud Computing. As per the report, in the last six years 20% of the workload has already been shifted from traditional offices to cloud environments, and a further 18% shift will happen by 2014. With the Big-Data battle all set to be intense and Cloud Computing Implementations being pervasive, I drilled deeper into relevant positioning of my favorite stock: Oracle. The company was a trailblazer in hardware and software solutions, and has successfully revamped itself into a Cloud-based provider in a very short period. It posted ~$222 million revenue from its cloud services in its 1Q13. With its announcement at the OpenWorld 2012 of IaaS, Private Cloud, Database 12c and Exadata X3, I anticipate its Cloud revenue to further increase in the future.

Let’s have a quick look at the how Oracle is placed against its peers 

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>6 Month Returns (~)</strong></p> </td> <td> <p><strong>PEG Ratio (5 Yr. expected)</strong></p> </td> <td> <p><strong>P/E Ratio (last 12 months)</strong></p> </td> </tr> <tr> <td> <p><strong>Oracle </strong><span class="ticker" data-id="204823">(NYSE: <a href="http://caps.fool.com/Ticker/ORCL.aspx">ORCL</a>)</span></p> </td> <td> <p>16.00%</p> </td> <td> <p>0.97</p> </td> <td> <p>15.50</p> </td> </tr> <tr> <td> <p><strong>International Business Machines </strong><span class="ticker" data-id="203983">(NYSE: <a href="http://caps.fool.com/Ticker/IBM.aspx">IBM</a>)</span></p> </td> <td> <p>-3.5%</p> </td> <td> <p>1.29</p> </td> <td> <p>13.74</p> </td> </tr> <tr> <td> <p><strong>SAP AG</strong> <span class="ticker" data-id="205363">(NYSE: <a href="http://caps.fool.com/Ticker/SAP.aspx">SAP</a>)</span></p> </td> <td> <p>28.00%</p> </td> <td> <p>1.64</p> </td> <td> <p>24.24</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

IBM, one of Oracle's closest competitors, has a P/E ratio of 13.6 compared to the industry average of 23.41, making it an attractive buying option. As discussed in my last post, its recent acquisition of Kenexa and Butterfly Software would be an extra stream of revenue for the company. Also, IBM generated ~$3.1 billion of free cash flow, and looking at its decent dividend payout ratio of 24% I see this stock as favorable for investors.

Another player in the cloud industry is SAP AG. The German giant has given the highest returns of ~28% on its stock compared to its peers in the last six months. SAP is also one of the leading players in mobile device management, and to further enhance this segment it recently launched six new mobile apps for Windows 8. However, considering its high P/E ratio of 23.69, I still think it’s an expensive stock to own.

Coming back to Oracle, the company has announced various new product offerings to keep focus on its Cloud and Database management fields.

  • Infrastructure as a Service (IaaS) – After announcing Platform as a Service (PaaS) and Software as a Service (SaaS) in 2011, Oracle is now venturing into IaaS. This leads Oracle to offer all the three tiers of Cloud Computing. This is a huge opportunity for the company to further enhance its existing enterprise customer base with its complete range of solutions for Cloud. With these offerings Oracle is targeting to improve its market share against other Cloud operators Amazon and salesforce.com.
  • Oracle Private Cloud – Along with the public services Oracle also extended its Cloud offerings behind the company's firewalls. The 'Oracle Private Cloud' helps the customers to enjoy greater flexibility and usefulness of both private and public Clouds.
  • Oracle Database Releases – It includes 'Database 12c,' which is its primary database release for the last five years. It provides more efficiency and more savings over its traditional offerings. Also to gain dominance over SAP in Big Data Analysis, Oracle launched version 3 of its Exadata as 'Exadata X3.' It provides huge improvements in memory over version 2, at the same price. IBM, on the other hand, has also launched three separate database platforms to compete with Oracle's Exadata X3.

Oracle is one of those companies that are known for its superior quality products and solutions with their unmatched speed, output, and cost performance. Database 12c and Exadata X3 would certainly add to the company's sales in the near term. With all these impressive solutions in the pipeline, I see Oracle in a comfortable position with its earnings expected to grow at ~11% annually from 2012 to 2017. I rate this stock a buy.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services recommend International Business Machines. 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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