When the larger-than-life Larry Ellison announced on Sept. 18 that he was stepping down as CEO of Oracle (ORCL), the technology and investment communities were stunned. ORCL is an entrenched technology leader — working in databases, applications and other software, as well as some hardware systems — but Oracle stock has dropped roughly 6% since Ellison’s bombshell.
The market reacted badly to Ellison’s surprise announcement not just because he has relinquished the reins. Investors are leery of his decision to elevate two of his minions — presidents Safra Catz and Mark Hurd — as co-CEOs. Bifurcating the duties of CEO is rightfully considered a classic management mistake that undermines decisiveness and clarity in decision making.
That said, the creation of two CEOs needn’t be seen as fatal for Oracle stock, nor permanent. In fact, the investment crowd seems to be overreacting to Ellison’s move — and therein lies an investment opportunity.
What to Love About Oracle Stock
From a straight valuation standpoint, ORCL’s trailing 12-month price-to-earnings ratio of 16.2 makes it cheap compared to the industrywide 39.4.
And despite the consternation created by Ellison’s move, Oracle stock still faces superb long-term prospects.
Installed software has been the locomotive pulling the train of Oracle’s 30-year growth, not only internally but also through a long string of shrewd acquisitions. The company now is pursuing an aggressive push into cloud computing; the cloud enables public or private organizations to improve IT capabilities without putting in place infrastructure, adding new personnel or purchasing software.
IHS Technology estimates that corporate spending on cloud computing will hit roughly $235.1 billion by 2017, compared to $78.2 billion in 2011. In 2014, global business spending for infrastructure and services related to the cloud are expected to reach an estimated $174.2 billion — a jump of 20% compared with the amount spent in 2013.
Ellison was CEO of Oracle for 37 years; he has a net worth of $48 billion, making him the world’s fifth-richest man. The 70-year-old tech titan didn’t get to the pinnacle of success by being obtuse. He presciently foresaw that the cloud is the present and future of information technology and has acted accordingly, giving the firm a leg up on its competitors.
Competition is fierce in the cloud space, but Oracle boasts several inherent advantages. Chief among them is a large installed customer base. Ellison might be stepping down, but one thing isn’t going away anytime soon: the company’s 400,000 customers in more than 145 countries.
Oracle can continually charge these customers for upgrades, maintenance and consulting advice — and that’s a high-margin business. Moreover, clients switching from ORCL would have to grapple with high costs, complexities and business disruptions.
More broadly, the technology sector faces robust growth prospects, as global economic recovery accelerates, smartphones become ever more popular, and corporations tap their vast cash stockpiles to make long-belated information technology investments. IT consultancy Gartner reports that worldwide IT spending neared $3.7 trillion in 2013, and estimates that it will be closer to $3.9 trillion by 2015.
At the same time, Oracle’s management has increasingly returned the company’s cash hoard to shareholders, in the form of dividend boosts (the firm’s dividend, started in 2009, currently yields a very modest 1.2%) and buybacks of Oracle stock.
Finally, let’s not forget that Ellison is sticking around at Oracle; he has assumed the twin mantle of executive chairman and chief technology officer.
Bottom Line
ORCL’s strategic investment in becoming a leading cloud services provider will pay off over the long run — and Oracle stock is a relative bargain today.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
