Oracle Corporation (ORCL) is proving to investors today that, despite a significant run up and despite a significant bullish bias, valuations may be catching up to even the best of the stocks out there. Oracle is easily a best of class stock, but the company’s earnings power and organic growth appear to now be fully reflected in its price.
This earnings report showed many issues out there lurking for SAP AG (SAP), Cisco Systems (CSCO), and perhaps even IBM (IBM). And let’s not leave out Microsoft (MSFT), EMC (EMC) or VMware (VMW).
Oracle’s earnings last night were $0.38 in non-GAAP EPS on and 18% revenue gain to $6.47 billion. Thomson Reuters estimates were $0.37 EPS and $6.35 billion in revenues. The problem is not just that the ‘must-hit earnings figures’ of $0.40 (or even $0.41 EPS fro WhisperNumber.com) wer enot hit. Take a penny or two, leave a penny or two. The problem is stretched valuations on top of a rally that is frankly getting long in tooth or getting old because it looks like the inverse of what we saw last February but on a slower scale.
The company did tout its Sun Microsystems (JAVA) acquisition, but this should be of no surprise. It is not like Larry Ellison to say, “Well it took longer than expected and we are trying…” Oracle gave guidance of revenue growth of 36% to 41% non-GAAP, but that is because of the Sun deal. Non-GAAP earnings were guided to $0.52 to $0.56 EPS, compared to teh Thomson Reuters figure of $0.53 EPS. Fair, but no screaming buy after the run-up we have seen.
Oracle hit a 52-week and multi-year high of $26.25. If you blend the Thomson Reuters estimates of $1.59 EPS for fiscal May-2010 and $1.88 EPS for May-2011 to derive a forward multiple a year out, Oracle traded at roughly 15-times earnings. After a 2% drop to $25.50 today, Oracle is looking more like about 14.6-times forward earnings. The going ‘accepted multiple’ for the S&P seems to be roughly 15-times earnings. In the new-normal this may be fairly priced, but still is representative of being priced for all the good news more than fairly valued in case things soften again.
As far as what to expect eslewhere, VMware (VMW) is the leader in virtualization. The VirtualIron purchase by Oracle won’t change that, at least not any time soon. VMware still trades close to a 52-week high north of $53 today, and its big concern here is a triple-digit traling P/E ratio more than anything out of Cisco.
EMC Corp. (EMC) is another enterprise spending play, albeit on storage. What is interesting is that Oracle said its noted that the Exadata unit is the fastest growing product in the company’s history. That is storage servers. A threat to EMC? No, not yet or not on a meaningful scale.
As far as Microsoft (MSFT), the big issue is the PC upgrade cycle for the retail and the enterprise issue is on the corporate and enterprise upgrade cycle now just taking place in Windows 7. This will be a focus for Windows 7 and the Office software upgrades. This is after part of the same money, albeit still in deifferent arena for the main apples to apples comparison.
The biggest comparison out there is Cisco Systems (CSCO). The business spending cycle for Cisco and Oracle are just too close to call. Oracle has outperformed on many aspects for the stock, but the spend is the same yet just after different technology dollars. At least for now. The only troubling issue is that Cisco Systems is down only marginally on what has become a soft day and when Oracle is down over 2%. Based upon Cisco’s stock being within striking distance of a new 52-week high as well, we would draw the same valuation comparison. A blend of the Thomson Reuters estimates for Fiscal July 2010 and 2011 generates a mid-point of $1.63 EPS and therefor a multiple of over 16-times forward earnings. Not expensive for Cisco, but not cheap if things grow even a tad more cautious in the next tqo or three quarters.
As far as SAP AG (SAP), is it fair to pound on this company any more? 4 CEOs in the last year, market share loss to Oracle every quarter, and a troubled business model. SAP even trades at a higher forward multiple of about 16.75-times forward earnings. Even if it is prudent to be value-aware on the price of Oracle shares today, if you hold a gun on an investor and say you have to buy Oracle or SAP… The obvious choice is Oracle.
The good news is that if the price softens up, then you will get a chance to buy the stock. If you want to buy the stock here today perhaps the best strategy would be to write the $26 April calls for one month out each month. That will take off about $0.30 each month from your cost basis..
