Would SAP Steal Database Market Share From Oracle?

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

Back in 2011, SAP (NYSE: SAP) told the market it planned to be the second largest database vendor by 2015. These words were received with skepticism. However, it seems now that SAP stands behind its words. The company reported that it has more than 1,500 users of its HANA database, up from 1,300 in the previous quarter. The company is expecting HANA to generate $850 million-$925 million in revenue this year. This is a 66% growth in revenue in comparison with the previous year. Can SAP continue the momentum?

The battleground

SAP is still not a major player in the database field. First place belongs to Oracle (NYSE: ORCL) with its famous Oracle Database, followed by IBM (NYSE: IBM) with DB2, and Microsoft (NASDAQ: MSFT) with SQL Server. Berenberg’s analyst, Daud Khan, stated that if SAP’s HANA is a success, he estimates its database market share to rise to between 15%-20% from the current low single-digits. Meanwhile, he downgraded Oracle, stating that the company would be the main loser if SAP succeeds.

Oracle Database is believed to be the most sophisticated product in the market, along with IBM’s DB2. However, this sophistication comes at a price. The databases are pricey and not easy to implement. Additionally, specialists needed to run these databases after they are implemented receive higher salaries than employees who specialize in Microsoft or SAP solutions. In the current environment of shrinking IT budgets, being cheaper is an extremely important selling point.

Microsoft is doing well with its SQL Server, too. While huge firms that implemented IBM or Oracle solutions may be reluctant to give up on them after so much spending, small and mid-sized companies would actively search for attractive solutions. That’s where Microsoft and SAP could step in.

The impact

For SAP, database is a prospect market. For Oracle, it is the main market and its database is the flagship product. Oracle gets more than 34% of its revenue from the database segment. If its market share shrinks, this would severely impact the company’s earnings. One can expect Oracle to make some moves to protect its market share. It is possible that the company may have to reduce pricing, as more and more customers count their pennies.

SAP’s HANA has yet to achieve a 5% share in the company’s revenue. If current growth rates persist, this would change and the database market would become increasingly important for SAP. Microsoft and IBM receive roughly 5% of revenue from databases. Microsoft has demonstrated good dynamics on all major business segments this year, so you can expect the database segment to grow as well. IBM’s share looks stable at this time, but nobody knows what’s around the corner.

Bottom line

SAP’s database growth of more than 60% would not come unnoticed. The stock, which is down 3% this year, could get a boost when investors find out that the database story is for real. Oracle is most threatened by SAP’s movements. Its stock has been an underperformer this year, up only 1% year-to-date. In comparison to SAP’s 19.47 forward P/E, Oracle trades at a more attractive 11.58 P/E. However, if the company starts to lose market share on its main products, earnings estimates would change and hurt the stock.

IBM and Microsoft are more attractive from an income perspective. IBM’s dividend yields 1.84%, while Microsoft’s dividend yields 2.58%. IBM trades at 11.25 forward P/E, while Microsoft trades at 11.66 forward P/E. The momentum is clearly on Microsoft’s side, with its stock up 35% this year, while IBM has gained only 9%.

SAP and Microsoft are the most attractive investments. SAP presents opportunities for future growth, while Microsoft shows good momentum in the present. 

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Vladimir Zernov 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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