Homepage

    SAVE   |   EMAIL   |   PRINT   |   RSS  
Oracle: the Yankees of software
The company looks good on paper but investors fear it will overspend on more acquisitions.
June 29, 2005: 5:40 AM EDT
By Paul R. La Monica, CNN/Money senior writer

Sign up for the Tech Biz e-mail newsletter
No love for Larry: Shares of Oracle have flat-lined for the past two years while shares of top rival SAP have soared.
No love for Larry: Shares of Oracle have flat-lined for the past two years while shares of top rival SAP have soared.
Many investors fear that Oracle CEO Larry Ellison is going to spend too much to buy other software companies.
Many investors fear that Oracle CEO Larry Ellison is going to spend too much to buy other software companies.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER

NEW YORK (CNN/Money) - Oracle CEO Larry Ellison must feel an awful lot like New York Yankees owner George Steinbrenner right now.

He's spent a lot of money to organize an All-Star caliber team, if you will. But he has little to show for it...at least in the eyes of Wall Street.

Oracle finally won a long takeover battle for PeopleSoft late last year. The $10.3 billion purchase eliminated a tough competitor for Oracle in the lucrative applications software market, selling software that helps automate routine business tasks like payroll and supply chain management.

The deal also helped to bolster Oracle's efforts against applications industry leader SAP.

In addition, Oracle (Research) won a bidding war with SAP earlier this year for Retek, a software company that caters mainly to retailers.

But Oracle's stock remains stuck at about the same level it was at when it first announced its hostile bid for PeopleSoft nearly two years ago. Shares of SAP (Research), on the other hand, are up nearly 50 percent.

Earnings should be solid

Still, analysts say Oracle's luck may finally be about to change. Because unlike the underperforming Yankees, Oracle actually is putting up playoff quality numbers...even if Wall Street refuses to recognize it.

Oracle will report its fiscal fourth quarter sales and earnings on Wednesday morning and the software giant should post extremely strong results. Analysts expect sales to increase 27 percent from a year ago, to $3.89 billion, and that earnings should come in at 23 cents a share, up 23 percent from the same period last year.

In particular, analysts expect Oracle to keep generating stable, dependable growth from its bread-and-butter database software business. Although the applications business has been getting more attention because of the PeopleSoft merger, database software still accounted for nearly 85 percent of new license sales in Oracle's fiscal third quarter.

And several analysts said they expect new licenses of database software to increase by at least 10 percent in the fourth quarter, which ended in May.

So why has the stock remained in a funk? Simply put, investors are worried that Oracle will continue to buy up more software companies and that it may hurt earnings by doing so.

It's kind of like the fear that Yankees fans have about Steinbrenner going out and spending top dollar for aged players whose best years are behind them instead of looking for promising young players on the cheap.

Don't fear more mergers

But some analysts think that investors are overreacting. Oracle, to be sure, will probably keep looking for more companies to purchase. But Ellison probably won't make the same mistakes that The Boss in the South Bronx has and overspend.

"There is a concern that Oracle will do something stupid but I don't believe they will," said John DiFucci, an analyst with Bear Stearns. "They will be fiscally disciplined with their acquisition strategy."

To that end, he thinks that companies like Siebel Systems (Research) and BEA Systems (Research), oft-mentioned as possible targets for Oracle, probably won't wind up getting acquired by Oracle in the near future because the stocks have already run up sharply on takeover speculation.

"Oracle won't pay too much. It's only going to buy as long as the price is right," said DiFucci.

Analysts say another reason that investors should be less worried about Oracle is because the company just hired a well-known software veteran, Gregory Maffei as its new chief financial officer last week.

Maffei was CFO of Microsoft (Research) from July 1997 to January 2000, a time when the notoriously conservative company built up its cash hoard and made several small, not blockbuster, acquisitions. So investors should expect the same from him at Oracle.

"Greg is a good fit for Oracle since he's a high-powered CFO type. And I don't think it will herald any huge change in strategy for Oracle. He'll continue to try and buy companies on the cheap," said Richard Williams, an analyst with Garban Institutional Equities.

There's also the issue of why Oracle has been out shopping in the first place. The software business is maturing and with growth slowing, it's probably smart for leading companies to take over the weak.

"Many investors are fearful that oracle will acquire this that and the other thing. But my contention is they need to," said Bert Hochfeld, an analyst with Hochfeld Independent Research. "The software industry is plagued by having too many companies. There are far too many duck hunters for the number of ducks out there."

To that end, SG Cowen software analysts wrote in a report late last week that Oracle might be interested in buying into the business intelligence market, companies whose software help analyze data. They said Business Objects (Research), Cognos (Research), Hyperion Solutions (Research) and MicroStrategy (Research) could be possible targets.

The companies have market values ranging from a low of $850 million for MicroStrategy to a high of $3.1 billion for Cognos. And considering that Oracle had more than $9 billion in cash as of the end of March, a purchase of any of these companies wouldn't exactly break the bank for Oracle.

So the negativity surrounding Oracle seems to be overdone. The stock now trades at a bargain valuation of 16 times fiscal 2006 earnings estimates even though profits are expected to increase by 20 percent next year.

That creates a good opportunity for investors, said DiFucci. Clearly, expectations are not terribly high for the company so he thinks that as long as Oracle reaffirms guidance for its fiscal first-quarter, then that would be a good sign. Analysts currently expect Oracle will post sales of $2.95 billion and earnings per share of 14 cents for the quarter, which ends in August.

"If Oracle comes in line with consensus, then that's really an indication that things are better than investors thought," said DiFucci. "That could be catalyst for the stock so there's a potential for meaningful movement to the upside."

In other words, Oracle might finally start performing like the champion that people expected it to be. As a Yankees fan, I wish I could say I had the same hopes for my favorite baseball team.

For a look at more software stocks, click here.

To read more about merger mania in software, click here.

Hochfeld owns shares of Oracle but has firm has no banking relationships with companies mentioned. None of the other analysts own shares of companies mentioned. Bear Stearns has done non-investment banking business for Oracle.


Sign up to receive the Tech Investor column by e-mail.

Plus, see more tech commentary and get the latest tech news.  Top of page

graphic


YOUR E-MAIL ALERTS
Oracle
Lawrence J. Ellison
Corporate Finance
Manage alerts | What is this?