Oracle Shares: 3 Pros, 3 Cons

This tech giant is on a roll, but it's hardly in the clear

   

So far, it’s been a good year for Oracle’s (NASDAQ:ORCL) shareholders. The stock is up over 17% year-to-date.

And the company has been keeping up the momentum. In its latest quarterly report, Oracle posted $2.5 billion in profits, up 18% over the past year. The adjusted earnings came to 62 cents per share, which beat the Wall Street consensus of 56 cents.

So how do the prospects look going forward? To see, here’s a look at the pros and cons:

Pros

Core Business: Oracle develops must-have products for enterprises, such as databases, servers and enterprise resource planning (ERP) applications (which help with functions like inventory, payroll and HR). This type of technology has high price tags and tends to be used for many years.

Acquisitions: Oracle is one of the best dealmakers in tech. In fact, the company made some recent acquisitions to bulk up its position in the fast-growing cloud market (such as for RightNow and Taleo).

But managing acquisitions is no easy task. If anything, this became an issue last year as Oracle ran into difficulties in closing new business. But the company has acted swiftly to improve its sales organization.

Economy: The improvement in unemployment and gross domestic product in the U.Ss should be a nice boost for Oracle. In its earnings report, the company said that license revenues increased by 7%. This is certainly a positive sign that corporate customers are getting more confident.

Cons

Hardware: With its acquisition of Sun Microsystems, Oracle is now a major player in this category. While there are synergies with the core software business, the hardware margins are much lower. Consider that in the latest quarter, Oracle’s hardware revenues fell 11%.

Competition: New operators, especially in the cloud space, are making inroads in Oracle’s business. One threat is WorkDay, which is a fast-growing provider of ERP services. Keep in mind that this is the management team that created PeopleSoft, which was purchased by Oracle.

Oracle is also feeling pressure on its database business, a market that also has some new players, like MongoDB and Couchbase. Even SAP (NYSE:SAP) has its own database.

Cloud: While Oracle has made some strong moves in this category, it’s far from clear if the company is still positioned to deal with the threat. That may require spending billions more on acquisitions, which would certainly be risky. Plus, Oracle has traditionally purchased mature companies — not those in the growth phase.

Verdict

It’s true that the cloud is a major challenge for Oracle, with operators like Salesforce.com (NYSE:CRM) and NetSuite (NYSE:N) showing lots of traction. There has also been a group of new IPOs in the cloud market, like Jive (NASDAQ:JIVE) and Demandware (NYSE:DWRE).

But Oracle’s recent acquisitions should be a big help. Besides, many top cloud providers actually use Oracle databases. So as the cloud grows, so should this business. And the recent uptick in the economy is likely to be a nice growth driver as well.

So when looking at all these factors, the pros outweigh the cons for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/oracle-shares-3-pros-3-cons-2/.

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