Why Oracle is The Best Value in Tech

Maxwell 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) might just be the best value in technology stocks these days. The maker of enterprise software is highly profitable, and it has a low share price, making it a close-to-textbook example of a value stock. However, some critics will argue that Oracle doesn’t have a bright future because of changes in the business, such as the rise of the cloud and the entry of Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) into the enterprise sector.

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In spite of the naysayers, Oracle is still maintaining a very high profit margin. As you can see, its quarterly profit margin was 24.86% in the third quarter of 2012. It also experienced a spike in profit margin earlier in 2012. Oracle’s high profit margin runs is in stark contrast to that of some of its competitors, including salesforce.com (NYSE: CRM) and Hewlett-Packard, which reported negative quarterly profit margins. Salesforce reported that its quarterly profit margin fell by 1.34% in the first half of 2012.  Hewlett-Packard reported a 29.85% drop in quarterly profit margin in the first half of 2012.

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However, at least one tech giant reported a higher quarterly profit margin than Oracle for the third quarter: Microsoft (NASDAQ: MSFT). Microsoft reported a margin of 27.9%, which was higher than those for Apple and Google. Apple’s profit margin was 22.86%, while Google’s was 15.43%. So Oracle’s quarterly profit margin number beats both Google and Apple, even though it is still below the biggest player in the field—Microsoft.

Unlike some tech companies, Oracle has figured out how to convert those high profit margins into a lot of cash. Not only is Larry Ellison’s company making a lot of cash and its ability to generate more cash is increasing. In the period that ended on Aug. 31, Oracle reported that it made almost $14 billion in cash from its operations.

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Oracle made $10 billion more in cash from its operations than its competitor, SAP. On Sept. 30 SAP reported it had made $4.88 billion in cash from its operations. In contrast, Salesforce.com reported that it had made just $718.46 million in cash from operations.

Larry Ellison doesn’t just generate a lot of cash with his company. He’s figured out how to keep a lot of it around as well. As of Aug. 31, Oracle had $31.61 billion in cash on hand. The amount of cash that Oracle keeps on hand has also been increasing steadily over the past few years, in spite of the hard economic times around the world. In contrast, SAP had just $4.91 billion in cash on hand.

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 From a cash standpoint Oracle is definitely undervalued, while SAP is overvalued. That cash, of course, is what will enable Oracle to thrive in a radically changing software field. Mr. Ellison has the resources to make acquisitions and strategic investments to get his hands on new software solutions. Oracle has just bought a stake in Engine Yard, a company that makes cloud platform solutions. Part of the reason why Oracle makes so much money is that it is constantly upgrading its capabilities.

Changes, such as the cloud and the increased use of tablets, are an opportunity for Oracle. It’s one of the few companies with the resources to bring out a wide variety of new cloud services for corporate clients quickly and efficiently. More importantly, Oracle can generate a lot of cash by charging corporate and institutional clients for these services.  

Unlike Google, which has to give a lot of its stuff away, Oracle can charge for almost everything it does. The company is currently charging between $175 and $2,000 a month just for its cloud-hosted database service. The price charged depends on the amount of storage a company uses.

If that wasn’t enough, Oracle has another big cash cow on the horizon in the form of infrastructure as a service (IaaS). In this service, Oracle will provide all of a company’s systems through the cloud. They won’t need servers or computer infrastructure; instead, Oracle will provide it for them and charge. All a startup will need to access this is computers with an Internet connection. This will enable Oracle to tap the small business market currently dominated by Amazon’s Amazon Web Services.

Oracle is a real value play. It generates a lot of cash and maintains some impressive profit margins. More importantly, Oracle has demonstrated an ability to constantly tap new revenue sources and keep its cash flow growing. Best of all, Oracle is currently underpriced for its value, making it a classic value buy.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle and has the following options: long JAN 2013 $50.00 puts on Salesforce.com, long JAN 2013 $50.00 puts on Salesforce.com, and short JAN 2013 $50.00 calls on Salesforce.com. Motley Fool newsletter services recommend Apple, Salesforce.com, Google, and Microsoft. 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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