As we have seen during the past few years, a variety of tech giants have imploded — notable examples include Nokia (NYSE:NOK) and Research In Motion (NASDAQ:RIMM). So it always is amazing to see a long-time tech giant that finds a way to grow — and make shareholders happy. One case is Oracle (NASDAQ:ORCL), which has produced an average annual return of 9.82% for the past decade.
And yes, the momentum has not stopped. In the latest quarter, Oracle posted net income of $1.8 billion, or 36 cents per share, up from $1.4 billion, or 27 cents per share. Revenues increased by 12% to $8.4 billion. On the earnings news, the stock spiked by 6.5%, but then it fizzled because of the falloff in the equities market.
So is there an investment opportunity? To see, here’s a look at the pros and cons:
Pros
Must-have products. Unless you are a tech guru, you probably never have used or seen Oracle’s software. But you certainly have benefited from the technology. The company is a leader in core systems like databases, servers and corporate applications. Such technologies are likely to remain essential for many years to come.
Strong leadership. Oracle CEO Larry Ellison is a legend. Besides understanding the key trends in the global software industry, he also has been savvy at building strong teams. Keep in mind that some of his prior executives have gone on to create stellar companies like Salesforce.com (NYSE:CRM) and Quest Software (NASDAQ:QSFT).
Hardware. Oracle is becoming a player in this market. To this end, the company has made key acquisitions, such as for Sun Microsystems. ORCL also has made aggressive investments with internal development. While hardware has lower margins, the business still is vital for future growth. The fact is hardware is an efficient way to help companies with areas like high-end storage, processing and security. And it looks like Oracle will get lots of traction from its Exadata and Exalogic offerings.
Cons
New innovations. While Oracle has tremendous lock-in with its customers, this can easily deteriorate. After all, there are emerging new technologies, especially in the cloud-computing industry. At the same time, Oracle’s licensing and maintenance fees are substantial — which could motivate customers to look for alternatives.
Mergers and acquisitions. This has been a key strategy for Oracle’s growth. However, it definitely can be risky and result in too much complexity. Just look at the case with Cisco (NASDAQ:CSCO).
Competition. Of course, Oracle must fight with many tech giants, such as SAP (NYSE:SAP), IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ). But smaller companies like Salesforce.com also are making an impact.
Verdict
Since 2005, Oracle has purchased more than 65 companies. While the dealmaking has not been perfect, it certainly has made the company much more competitive. And even as the software market matures, there is likely to be continued growth. After all, in a highly competitive global marketplace, companies need ways to be more nimble, and software is a smart way to do this.
Besides, it looks like Oracle has more room to find more efficiencies in its own organization, which should mean even higher margins.
When looking at all these factors, the pros outweigh the cons on the stock.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
