NOTHING'S WRONG WITH ORACLE --According to Paul R. La Monica of Red Herring
Fish or Cut Bait: Loving Larry
By Paul R. La Monica
Redherring.com, November 27, 2000
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The market, obsessed with Mr. Ellison's personality quirks, is ignoring the fact that Oracle is a fantastic company. CIBC World Markets analyst Melissa Eisenstat had a very apt headline for her report about Mr. Bloom's exit: "Lucky the fundamentals are so strong..." It's true. Investors are punishing Oracle even though it has done nothing but report fantabulous levels of growth for the last few years. With the way Oracle's stock has performed as of late, you'd think that the company has issued numerous earnings warnings this year, like Lucent Technologies (NYSE: LU) or Dell Computer (Nasdaq: DELL).
Oracle is a victim of the market's unreasonable expectations. The stock has slid since Oracle reported solid fiscal first-quarter results in September. Earnings more than doubled from a year ago, and Oracle beat expectations by 30 percent. What was the problem? Revenues from Oracle's applications software business, basically Oracle's e-business software package, increased only 42 percent from a year ago, a pace that was below the highest estimates of Wall Street. You're kidding me right? Forty-two percent year-over-year growth is supposed to make investors run for the exits?
Of course, applications software is still a small part of Oracle's overall business. The slower growing database software segment accounts for 72 percent of Oracle's software licensing revenue. So analysts and investors clearly want to see higher growth levels from the applications side. But revenue growth is only part of the profit equation. Oracle has been boosting margins by cutting costs. It's true that you can't slash expenses indefinitely, and revenue growth will be the ultimate driver of earnings growth, but what's wrong with keeping a tight rein on expenses? The company reported net margins of 21 percent in its latest quarter. That's significantly higher than margins for Siebel, I2, and SAP.
Oracle's earnings growth is starting to slow. But that's what happens when you become a company as large as Oracle. Growth slows. It's happened to Microsoft and Intel, and it's starting to happen to Cisco. But the expected growth levels, while not as heady as the last few years, are still very robust. Analysts estimate that Oracle will report a gain of 43 percent in fiscal 2001, 22 percent in fiscal 2002, and 25 percent annually for the next three to five years.
The stock is down 40 percent since Mr. Lane left and is now trading at 40 times earnings estimates for its next fiscal year (ending in May 2002). It hasn't been this cheap in a while. In light of the sagging stock price, now is an opportune time for savvy long-term-oriented investors to pick up the stock. This is one of the premier buy-and-hold technology companies -- and it's on sale.
But one last comment about those concerns regarding Mr. Ellison. Don't get me wrong, I'm not suggesting that we canonize the guy. But I find it hard to believe that things are so bad under his watch that there will be nobody left who is capable of leading the company when he does finally step down. So forget all the psychobabble about Larry's numerous idiosyncrasies and focus on the numbers. Since when is being all warm and fuzzy a prerequisite for becoming a successful CEO of a publicly traded company anyway?
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