<< And
the big ones like Cisco and ORCL are also very overvalued.>>
Company Focus
April 10, 2000
Volume 2, Number 15
Oracle Wakes Up the Corporate World and Wall Street
Sleeps - Oracle Corporation
By Tad Trantum, CFA
Six months ago, Oracle's [ORCL: NASDAQ, $87.13 on 4/07/00]
executive management outlined a plan for saving $1 billion in eighteen
months through the internal implementation of Oracle's technology.
These goals seemed but a pipe dream to most at the time, however,
Oracle has executed above and beyond their goal, realizing $1 billion
in savings with merely half of the implementation complete. Last week,
at the Oracle analyst meeting, management's progress report was more
than impressive, but in usual style, Wall Street failed to wake up and
see the light. Yes, many of these analysts have "Buy" ratings on Oracle,
but their analysis of the impact that Oracle is having on the corporate
world was grossly understated and generally ignored. Enterprises of all
sizes and shapes have eagerly opened their eyes and ears to the
significant value proposition that Oracle is realizing and now offering
to all that will listen. The following summary describes one of the
most exciting corporate developments in modern corporate history.
In the past year Oracle has improved operating margins from 19.6% to
31.4% through the fast and efficient implementation of a simple,
complete information modernization solution:
Oracle's plan to move from 40 to 2 data centers is only 30%
complete. This translates into less hardware, software, people,
buildings, and administration. In addition, Oracle is able to
deploy new technologies more rapidly across its global
infrastructure.
Database consolidation provides real-time accurate information
that can be accessed from anywhere.
Reducing the number of mail servers from 97 to 2 (currently
down to 7 mail servers) is creating a more simplified global
Information Technnology infrastructure.
The opportunity created by Oracle's technology to consolidate
software, hardware, people, and buildings translates into cost
reduction of more than 30% over two years and an IT headcount
reduction of greater than 50% over the same time period.
Customer service via the Internet combined with product
simplification is allowing Oracle to slowdown the scaling of
employees for customer support while accelerating the growth of
the customer base. Currently, 30% to 40% of customer calls are
serviced on the Internet, and the goal is to match Cisco, where
80% of customer support does not involve a human.
Employee self-service costs have declined more than 50%. As a
result, Oracle can reallocate the expense reduction to more value
added investments like research and development. In fact, overall
headcount growth has fallen from 20% in the first quarter of
1999 to a negative number in the most recent quarter, while
research and development headcount growth has accelerated from
10% to 20% over the same time period.
The rollout of customer relationship management tools is in the
earliest stages for Oracle and has the greatest potential for cost
savings over the next twelve months. Estimates for cost
reductions have increased from $550 million to $1.4 billion,
which is still conservative according to Oracle management.
This is just a sampling of the transformation underway at Oracle. The
"$1 billion cost savings story" has turned into the "$2 billion plus cost
savings story" and is swinging the doors of CEO's offices wide open to
Oracle. In fact, management admits to underestimating the power of
this story in selling Oracle software.
Oracle has not only discovered and developed a more comprehensive
and effective software product for the end-to-end management of the
corporate world, but they have set a standard for implementing and
leveraging resources to rapidly grow a business. A more functional,
simple, and complete solution with less people and lower costs is
music to a CEO's ears. So, how long will it take to realize this kind of
value for a company that chooses Oracle? Oracle's customers begin to
realize the fruits of their investment within several months, whereas the
implementation of SAP's [SAP: NYSE, $58.56 on 4/07/00] ERP
software can take as much as three years, cost more than $1 billion and
not even be Internet enabled. That is why more than 40 SAP customers
have abandoned SAP in search of a solution capable of meeting their
needs for competing in a world that is moving at Internet speed.
Oracle has positioned itself as the pioneer of process, technology and
cultural change in the New Economy. While Wall Street slumbers,
corporations are eagerly embracing Oracle's value proposition in order
to be more competitive in this dynamic and fast paced Internet world
where sleep is not an option for those who play to win.
Oracle
Microsoft
Seibel
Peoplesoft
I2
ROE (1-Yr Est)
47%
28%
24%
4%
14%
P/E (Next Yr)
113
43
140
156
431
EPS Grwth (5-Yr)
40%
25%
54%
21%
70%
P/E (Risk-Adj)
18
21
70
156
342
GRAD Points?
22
4
-16
-135
-272
Oracle has just begun to tap the demand for the full e-business
solution. Management made several comments specific to the next
couple of quarters that are an indication of Oracle's ability to leverage
their leadership position well into the future: the current quarter's
general business pipeline is showing 100% growth, the sales force has
customers knocking down their door for Oracle's solutions,
management referred to several blockbuster deals to be announced
shortly, and the margin expansion still has a long way to go. Given the
Oracle's bullish outlook and the level of technology investment
spending, Wall Street is underestimating the future earnings power of
Oracle based on the consensus growth rate of 26%. A 40% 3-5 year
EPS growth rate is accurate representation of Oracle's opportunities.
As a result, the risk-adjusted P/E of 18 measured against a 40%
growth rate results in 22 GRAD Points?.
Oracle over valued???? LOL!!! |
