Either Oracle
Money
March 15, 2001
Oracle's lackluster results don't exactly suggest a turnaround is at hand.
By David Futrelle
If you're going to call yourself Oracle, you should be able to see at least a few months into the future, right? Apparently not, judging from Oracle's earning warning earlier this month -- a warning that company officials said was as much of a surprise to them as it was to the stock's many fans. Oracle officials had been saying, loudly and repeatedly, that their company was more or less immune to the tech downturn. Turns out it wasn't: Oracle execs chopped third quarter earnings estimates by a couple of cents a share, saying that they were shocked --- shocked! -- that a number of key customers had decided at the last minute to postpone their orders. Adding to investors' uneasiness, Oracle declined to offer detailed guidance for the fourth quarter. A slew of analysts chopped their ratings for the stock, and investors rushed to the exits, sending the stock down more than 20 percent.
Oracle met its lowered expectations of earnings of 10 cents a share when it announced after the bell this Thursday. The company reported slightly better than expected database revenues, up 6 percent from last year. But applications revenues were up only 25 percent, a growth rate half of what the company forecast when it warned March 1. (Not that long ago the company was promising 75 percent applications growth.) The company still hasn't gained any confidence in its ability to predict the future; Chief Financial Officer Jeffrey Henley could only "guess" that earnings for the fourth quarter would be flat.
Should investors put their confidence in Oracle? That's tough to predict. The last time I wrote about the company in detail, back in November, the stock, selling at nearly 60 times forward earnings, looked more than a bit pricey. Since then, the P/E has been cut roughly in half.
As a corporate competitor, even in today's difficult climate, there's a lot to like about Oracle, It's an aggressive company with solid profit margins, and it's ably demonstrated the power of its own software by using it to cut its own costs dramatically. The company dominates the database market and is making some headway in its applications business. Indeed, before its earnings warning this month, I was starting to think Oracle was looking like an attractive long-term bet.
But that warning snapped me right out of it -- not only because it revealed that Oracle wasn't immune to the tech downturn but because it revealed that company officials were unwilling, or unable, to accept that fact. Oracle's stock, even at its current depressed price, doesn't look like much of a bargain. Trading at about 27 times fiscal 2002 earnings, the company's valuation is roughly in line with the company's estimated long- term growth rate of 20 to 30 percent. Compared to Oracle's rich valuation in better times, that seems cheap. But that's assuming you have faith these estimates will hold up.
In order to hit its numbers in the long term, Oracle needs to keep its maturing database business growing at a reasonable rate. It also needs to keep its applications business growing fast enough to make up for slowing database sales. And it has to keep running leaner and meaner than ever. In the current economic environment, all these things may prove damnably difficult, as the company's disappointing applications results show all too clearly. By buying into the stock at current levels, you're essentially betting that Oracle officials won't hit us with any more "surprises" any time soon. I'm not sure that's a bet worth taking.
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