The Oracle of Oracle
Stock indexes are retracing levels last seen 12 years ago, but in many cases sales and earnings are still coming in higher than ever for leading tech companies. That phenomenon has turned once-mighty Oracle (ORCL), maker of database software, into both a value stock and also one of the last growth stories left standing in tech.
The $75 billion market-cap company has fallen 19% in the last 12 months to a recent $15.01 on worries that spending on corporate software programs such as databases and middleware will evaporate completely this year. But among large-cap tech companies, Oracle is one of the few growth stories left in technology, a sector that has been devastated by falling estimates for all hardware products, including personal computers, cellphones and networking equipment.
Corporate software-industry sales are weak and the propensity among companies to spend on software is declining, according to a note put out Monday by Friedman Billings Ramsey's David Hilal, but Oracle has a balance sheet to weather the storm, not to mention the ability to grow faster in a recovery by buying cheap software companies during the current downturn.
Based on valuation, Oracle isn't getting much credit for its projected growth and its strong financial position. Oracle's forward four quarters' price/earnings multiple of 10.4 is in line with the 10.3 of the Standard & Poor's 500 index of large-cap stocks, which is the cheapest the index has traded in over 20 years.
Younger companies with higher growth are stealing all the limelight, with software-application company Informatica (INFA) fetching a 15.6 multiple, and Salesforce.com (CRM) garnering a 50 multiple. However, really tough times call for reasonable expectations to go with a reasonable valuation. If Oracle can return to something closer to its median 10-year forward four quarters' P/E of 16.6 over the next 18 months, the stock could rise from $15 to $25.
Oracle will probably increase sales 5% this year and next, and profit may grow 9% this year and 8% next year. That's certainly better than the 11.5% decline expected this year for the S&P 500 companies' average earnings per share.
Nor is 5% sales growth poor relative to expectations for Oracle's large-cap technology peers. Microsoft's (MSFT) revenue will probably grow only 1.2% this year, while IBM (IBM) and Hewlett-Packard (HPQ) are both expected to see sales decline this year, by as much as 5%.
The biggest risk to Oracle is not slowing software sales, but rather the rise in the U.S. dollar, which drastically reduces reported sales and earnings growth. In the November quarter, total revenue was up 13%, year over year, when counted on a "constant-currency basis, but up only 6% counting the dollar's rise.
While no one can predict the direction of the dollar, it's important to bear in mind a countervailing factor: Oracle's been buying its shares, thus helping reported earnings down the road.
In the November quarter, the company purchased $1.8 billion of its shares, at an average price of $17.14. That added one penny to earnings per share.
With $10.5 billion in stock, debt trading above par and not due until 2014 at the earliest, Oracle has a rock-solid balance sheet with which to weather the current downturn.
Buying tech stocks when tech spending is falling apart takes nerve, to be sure. If a great company like Oracle can return to high growth in a market upturn, such nerve could reward investors handsomely.
