Last week, IBM (NYSE:IBM) celebrated its 100th birthday — a huge milestone. How many tech companies have been able to be a top player despite the industry’s many changes and threats? The fact is that the sector is strewn with many dead companies.
Despite this, there are probably a few other tech companies that will live to see their 100th birthday. One that has a chance is Oracle (Nasdaq:ORCL).
The company has already been around 34 years, and its market cap is a hefty $157 billion. And while other tech giants have treaded water – like Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC) and Cisco (Nasdaq:CSCO) – Oracle has been a strong performer for shareholders. During the past five years, the average annual return has been a juicy 17.2%.
Let’s take a look at the current state of Oracle’s pros and cons:
Pros
Global platform. Oracle is the world’s largest business software company. Its products range from databases, middleware and applications, and they are a tremendous source of cash flow.
Oracle’s offerings are optimized for security, high performance and reliability. What’s more, once customers are brought in, they find it extremely expensive to switch to an alternative. In other words, there is a high level of lock-in.
M&A prowess. Larry Ellison, the CEO and co-founder of Oracle, made a key strategic change in 2005 — he focused on aggressive acquisitions. He believed it was the best way to maintain growth. At the same time, Ellison thought there were many opportunities for cost-cutting. The strategy has been a great success.
Hardware. While software still makes up much of its revenue, Oracle is making moves into hardware. This was a big part of its acquisition of Sun Microsystems.
Why is hardware important? The reason is that high-end products may be more efficient and provide better performance if they are in the form of an appliance. Besides, Oracle has the advantage of leveraging its software expertise to develop seamless technologies.
Cons
Competition. Oracle must contend with extremely tough rivals. They include biggies like SAP (NYSE:SAP), IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ).
But there are also smaller operators that are worthy adversaries, such as Salesforce.com (NYSE:CRM).
Complexity. Oracle will likely continue to buy companies, but there are big risks. Integrating technologies, customers and employees is not easy. Also, as a company adds more products, it can be tough to manage. This has certainly plagued companies like Cisco.
Disruptive changes. No doubt, Oracle has hefty fees. But at what point will this alienate customers? Consider that there are a growing number of robust open-source software systems. These are essentially free and require lower service costs.
Verdict
The tech world is in the midst of some huge growth trends. These include things like Big Data, cloud computing and virtualization. The good news is that Oracle will benefit from these trends because its software and hardware are critical to delivering these technologies. For example, in the latest quarter, revenue jumped 13% to $10.9 billion and the operating margins were about 38%.
What’s more, in the coming quarters, there should be a nice boost from the hardware business, such as with its Exadata and Exalogic products.
Considering the positive factors and continued momentum, the pros outweigh the cons for the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
