ORCL Stock: Why Oracle Corporation Had to Buy Netsuite Inc. (N)

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The announcement on July 28 that Oracle Corporation (NYSE:ORCL) will buy Netsuite Inc. (NYSE:N) for $9.3 billion, or $109/share, may have been the worst-kept secret in Silicon Valley.

ORCL Stock: Why Oracle Corporation Had To Buy Netsuite Inc. (N)

The cloud software provider was up 9% just on Wednesday, and had risen more than 35% over the last month, as analysts anticipated the move. They are still getting a premium of 18% on the day, and the stock jumped close to the sale figure in pre-market trading when it was announced.

Netsuite was launched in 1998 by Evan Goldberg, a former Oracle executive, and Oracle founder Larry Ellison. Ellison owned 61% of the company when it went public in 2007, and was bragging on his former majority stake as recently as last month.

Ellison and his family, however, currently own about 40% of Netsuite. The press release on the sale emphasized that the price, and the deal, were negotiated through a committee of Oracle outside directors.

N Stock History

Like Salesforce.com, Inc. (NASDAQ:CRM), which it closely resembles, Netsuite was founded as a way to get new use from Oracle’s database software by selling it as a service. While Salesforce was about customer relationship management (hence the CRM stock symbol), Netsuite focused on enterprise resource planning, financial reporting and helping retailers combine stores and online sales in what was called “omnichannel.”

But while Salesforce has been running close to break-even, and reached $6.6 billion in sales last year, Netsuite has been on a more modest trajectory, consistently losing money and bringing in just $741 million of revenue for all of 2015. Analysts were expecting more of the same for the current quarter, a loss of about 37 cents per share.

To keep growing, and to turn a profit, Netsuite needs to invest heavily in expanding its range of offerings and in adapting its software beyond Oracle hardware. A lot of Salesforce’s mojo in the last few years has come from its agreements to run the software on Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDQ:MSFT) clouds.

It appears that, in the future, Netsuite and Salesforce are going to become direct competitors.

As badly as Netsuite needs Oracle, however, Oracle needs Netsuite more. Oracle’s top line hasn’t grown in years, its margins have been deteriorating, and the stock is now trading at a small premium over the market, at 20 times earnings, despite having initiated a dividend back in 2009 that now yields 1.5%. The stock chart has been virtually flat since 2014.

While Ellison keeps claiming Oracle is a “cloud” company, it’s not. It’s a client-server database company, having rolled up most of the applications in that space during the 2000s. Its purchase of Sun Microsystems in 2010 gave it proprietary hardware, but cloud is based on commodity hardware and open-source software, which runs counter to Oracle’s corporate DNA.

Netsuite gives Oracle a direct Salesforce competitor, with entirely compatible software and a growth story. Netsuite revenues grew 33% last year, as a lot of Oracle customers decided to finally pull the trigger on cloud and software as a service. Oracle will now be able bill itself as a bigger version of Salesforce.

Netsuite’s revenues will still represent less than 10% of the total for Oracle, even if it continues last year’s growth rate, and the press release line about it being accretive “on a non-GAAP basis” needs to be taken with some salt.

Especially ironic is the first line of the release, which calls Netsuite “the very first cloud company.”

Bottom Line on ORCL Stock

Still, Oracle stock was up on the news, by nearly 2%, early today. That’s about $3 billion in market cap before the stock even trades, on a $9.3 billion purchase.

Ellison’s own bank account is getting a big piece of the premium his company is paying. He’s got to be wearing a very big smile.

But should investors? After the cheering stops, can Netsuite become the growth engine Oracle lacks?

Personally, I think Oracle is in a similar position to International Business Machines Corp. (NYSE:IBM), which keeps growing new cloud-based revenue streams but keeps losing older revenue streams even faster.

Oracle may find itself running very, very fast in order to stay in the same place.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares of AMZN, GOOGL, and MSFT.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/orcl-oracle-buy-netsuite/.

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