Oracle’s Growth Prophecy

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Oracle (NYSE: ORCL) reported its second quarter earnings for fiscal 2013 with revenues beating analysts marginally with a notable increase in earnings. Sales of new software licenses and subscriptions to cloud services contributed to an 18% increase in revenues compared to a year earlier quarter. The impact of positive numbers and investors’ optimism about Oracle could be well judged by the increase in stock prices by 2.5% after the earnings announcement.

The Number Game

The revenue was reported at $9.09 billion growing by 3% compared to the same period last year. Revenue growth was mainly driven by a 10% upsurge in software revenues, reported at $6.65 billion and new software licenses and cloudware subscription revenues, which rose by 17% to $2.39 billion. Net income was reported at $2.58 billion marking a sharp increase of 17.7% from the last year’s figures due to a 9% decline in taxes. Non-GAAP earnings have risen sharply to $0.64 per share on account of repurchase of nearly 350 million shares worth $10.2 billion over the past year.

Is there growth?

Oracle has always looked for ways to grow be it organic, innovation, technology or acquisitions. Oracle has acquired more than 80 companies by spending over $40 billion in the last decade. Oracle’s acquisition of Sun Microsystems in 2010 has proved to be very beneficial as Java, the world’s most popular programming language, was acquired through it. Sun’s hardware technology has helped Oracle’s profitability and has tremendous growth potential in the future too.

Oracle’s cloud offering of HCM, ERP and others is supposedly the best in the industry and its cloud business on the whole is growing rapidly. The cloud should improve operational efficiencies, reduce costs and help in saving time. These benefits should help in the growth of the cloud network at about 30% annually, thus becoming a $250 billion business (approximately) in a decade. Oracle can derive tremendous growth from the overall industry growth with a combination of the right assets, technology and right people at the right place.

A Look Around

Oracle faces tremendous competition from SAP (NYSE: SAP) in its effort to tap in the cloud market. SAP has also been shopping companies strategically over the years to boost its foothold in the cloud network. SAP has acquired Ariba, maker of Web-based software that connects suppliers and buyers online, this year and SuccessFactors last year, as an entry point into the cloud, which should add to the company’s revenue.

Like Oracle, Microsoft (NASDAQ: MSFT) believes in diversification for its success. Microsoft has an edge over Oracle with an ROE of 24.50% compared to Oracle's 24.16%. Microsoft has a leaner debt-to-equity ratio of 0.17 compared to Oracle’s 0.34. The company has $66.07 billion in cash compared to Oracle’s $31.61 billion, which is being well used to provide handsome dividend to its investors.  Microsoft’s latest operating system, Windows 8, runs on desktops, laptops and is also designed to run on tablets, including Microsoft's own Surface. Microsoft has a stronger balance sheet and a larger foothold in products and services provided in comparison to Oracle.

Final Words

Oracle has been acquiring the right businesses like RightNow, Endeca and Taleo to enhance its earnings and revenues along with diversifying its portfolio of offerings. Oracle is cheap compared to its peers on a forward P/E basis of 11x as it has a long-term historical P/E of 15x.  Oracle's EBITDA margin is upwards of 46%, which should improve further with the growth of the cloud industry. The short-term gain prospects in Oracle seem to have diminished after the stock price has increased by 15% in the last three months but being among top ten tech stocks favored by hedge funds it is a definite yes for long-term investors.

tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and Oracle. Motley Fool newsletter services recommend 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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