Is a Flurry of Partnerships Good for Oracle?
Vladimir 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) delivered a poor quarterly report, missing both on earnings and on revenue. The stock was punished. One of the main reasons for the miss was soft cloud subscription growth. Right after the earnings announcement, the company announced cloud partnerships with Microsoft (NASDAQ: MSFT), Salesforce (NYSE: CRM) and NetSuite (NYSE: N).
Would these deals help the stock?
The essence of the deals
Oracle’s database software will now be supported by Microsoft’s Windows Azure platform. This sounds interesting, because Oracle’s new 12c database is one of the main competitors to Microsoft’s SQL Server database. It seems like Microsoft does not want to limit the reach of Windows Azure. At the meantime, the company is ready for free competition with Oracle. Oracle, which struggles to produce growth that would impress investors, gets the possibility to attract a wider customer base.
Salesforce relies on Oracle’s database for its operations. Salesforce CEO Marc Benioff has stated that the nine-year deal will cut database server costs in half. The companies’ apps would be able to share data with each other, making it easier for customers to use solutions from both companies. Oracle promised to leave Salesforce’s Customer Relationship Management (CRM) system in place when Oracle buys a company which already employs one.
Oracle’s partnership with NetSuite will help deliver integrated cloud offerings for mid-sized businesses. These offerings would feature Human Resources (HR) software from Oracle and Enterprise Resource Planning (ERP) software from NetSuite.
Bearish for NetSuite
Oracle faces significant headwinds from the economy. The cloud is not growing as fast as investors may have hoped. The company is trying to push its product offerings as far as it can. Although these moves seem good for Oracle, they can be seen as a warning sign. When the market is growing fast, companies do not bother bargaining with each other and getting partnership. The big ones just buy the small ones.
Among these four companies, only NetSuite can be seen as a relatively small company. In fact, with a market cap reaching $7 billion, “small” is an awkward word to describe NetSuite. If we look closer at NetSuite, we can see that the stock market is the source of the capitalization, not the business itself. The rise of the share price has pushed the company’s forward Price Earnings (P/E) multiple to an astronomical 216. With the economic dynamics we currently see, I cannot imagine the growth that must happen to justify the share price.
There is only one thing that NetSuite investors can count on. If the company is bought at a premium to the market price, investors would be happy. Recent Merger & Acquisition ( M&A) activity spurs hopes for such a scenario. If we assume a moderate 35% premium for NetSuite, this would mean that someone would have to pay as much as $10 billion. Who can afford this?
NetSuite was co-founded by Oracle's Larry Ellison.Thus, Larry is a major shareholder in NetSuite and benefits from the rise of the stock's price. Would this fact make Oracle look to purchase NetSuite? I don't think that at current prices it is a plausible scenario. In addition, if such an offer were made, Oracle would have to battle in numerous lawsuits for overpaying for NetSuite in favor of Ellison's stake.
I cannot think of a bidder for NetSuite. The big companies who sell their CRM and/or ERP solutions do not need other systems to sell. There would be no synergy in such an acquisition.
Bearish for Salesforce
Salesforce, which trades at 65.7 forward P/E, is a growth stock. The company is valued more conservatively than NetSuite. This is expected, because Salesforce has almost 10 times more sales than NetSuite. Nevertheless, the market expects good growth from Salesforce. Otherwise, why the stock is pricey?
Salesforce was active in trash-talking Oracle and dreaming of becoming the dominant player in the field. It seems like the company has done a reality check and found that it needs to manage its costs in order to improve profitability. The partnership with Oracle suggests that Salesforce has become more modest in its ambitions. Not good given the price of the stock.
Good for Oracle and Microsoft
The Oracle-Microsoft deal is a partnership of equals. Microsoft, which is having a good year, strengthens its cloud presence. Despite the fact that its stock has risen 30% this year, Microsoft is still attractively priced with an 11.2 forward P/E. The stock yields 2.68%. Microsoft could be getting more market share with its Microsoft Dynamics CRM, as it is focused on small and mid-sized businesses who do not need the full power and sophistication of Oracle's and SAP's products. Its Office family smoothly migrates to the cloud, which would help boost earnings in the long term.
Oracle gets a chance to compete on Microsoft platform, which can potentially lead to bigger sales if Oracle succeeds on this front. The deal with Salesforce secures a big client for almost a decade. Oracle got hit after its recent earnings report, and looks attractive with 10 forward P/E and an increased 1.52% dividend yield.
Do not forget about Oracle's $12 billion buyback plan. The tech giant has priced a $2.6 billion debt offering to help finance this plan. In the meantime, there are constant rumors that a sizable amount of Oracle's salesforce is leaving the ship. The company blamed sales execution for its quarterly miss, and one can speculate if the problem continues in the current quarter.
After a pullback, Oracle presents a buying opportunity. The company has made smart moves to solidify its position in the cloud business. Microsoft looks attractive too, given the dynamics of this year.
Salesforce, which is down 9% this year, starts to realize that not everything is rosy. When more investors realize that, the stock would fall further. NetSuite investors rely on the takeover story. There is no way the company can justify its price otherwise.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Netsuite and Salesforce.com. The Motley Fool owns shares of 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!