During the past two quarters, Oracle (ORCL) has picked up a bad habit: disappointing Wall Street. ORCL can’t seem to find growth, and investors have dumped shares in response. So far, the stock has returned a horrible -10%.
Oracle’s senior management has blamed its woes on the sluggish global economy and issues with the sales force. While the first factor seems pretty legitimate (Oracle wouldn’t be the first company to point its finger at a globe), sales force issues over multiple quarters is questionable … plus, there might be deeper issues involved.
So, should you buy Oracle with the thought that it’s really just a poor environment, or are there enough nagging issues that ORCL is worth avoiding right now? To see, let’s look at the pros and cons:
Huge Footprint: Oracle CEO and co-founder Larry Ellison is a legend in the software business. He’s also fiercely competitive … something you’d expect from a guy who worships Genghis Kahn and lives by his famous quote, “It’s not sufficient that I succeed. Everyone else must fail.” This approach has allowed Oracle to thrive, even amid disruptive changes in technology. Ellison has helped build an empire that boasts 390,000 customers — including every Fortune 100 firm — across more than 145 countries. He’s also led a focus on mission-critical technologies like databases, servers, middleware, data analytics and enterprise resource planning (ERP), which helps manage financials, inventory, HR and supply chains.
Cloud Business: During the past few years, Oracle has struck a variety of acquisitions to ramp-up this segment. Some of the deals include RightNow, Taleo and Eloqua. So far, the strategy has been working. The annual run-rate of the cloud business is over $1 billion, which is larger than Workday (WDAY) and SAP (SAP) combined. During the latest quarter, Oracle has snagged customers like British Telecom (BT), BMC Software (BMC), Siemens, Yahoo (YHOO) and Intuit (INTU). But M&A is not the only part of the story. Oracle also has the benefit of its massive infrastructure. The cloud system has 13,000 virtual machines, 70 petabytes of storage across seven countries and processes a billion transactions per day. Finally, Oracle has stuck some important partnerships. Just this week, the company has announced deals with Microsoft (MSFT) and even its nemesis, Salesforce.com (CRM).
Cash-Flow Machine: Even with tepid growth, Oracle still has little problems with making money. For the past year, the company generated $14.2 billion in operating cash flows and during the past eight years, they have grown an average of nearly 19% per year. The total amount in the bank is $32.2 billion. Plus, Oracle has also been mindful of shareholders. The company repurchased $2.8 billion in shares during fiscal Q4 and recently authorized a repurchase plan for up to $12 billion.
Global Headwinds: In the latest quarter, there was broad-based weakness in Japan, Brazil and Australia that has involved a combination of slow growth and currency volatility. Unfortunately, there are now signs that China is feeling the pressure, which could mean more trouble for Oracle.
Disruption: The cloud has certainly been a big threat for Oracle as well and there’s a good chance that companies like Workday will continue to take market share away. At the same time, Oracle’s database business is under pressure. There’s a new type of technology, called NoSQL, which appears to be better able to handle the needs of mobile and Big Data. The main players in the space include operators like Couchbase, Datastax and MongoDB. They not only provide strong technologies but have price-points much lower than Oracle’s.
Hardware Business: Oracle’s footing in the hardward biz came with the acquisition of Sun Microsystems back in 2010 … but the deal has been an albatross. The core server business has suffered tremendously from low margins and stiff competition. While there are signs that the deterioration may have bottomed, it’s a good bet that the business will not grow any time soon.
With the fall-off in the stock, the valuation of Oracle’s shares is certainly attractive. The forward price-to-earnings ratio is only 9. Still, the problem is that there are few signs that growth will come back — at least for the rest of the year. Plus, the problems in Asia will likely continue … and there will be continued pressure from cloud operators and database startups.
So in light of all this, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.