Pru Investment Opinion: 12/09/98 at $35 11/16
We rate ORCL an ACCUMULATE/SBI for the following reasons:
* We believe that Oracle is well positioned to benefit from a maturing client/server market. The company remains financially stable and we believe it is viewed as a safe choice vendor. The company's performance during the most recent quarter indicates new traction on the product front as well. As we have noted in the past, the services organization retains a substantial competitive differentiation given that customers in mature markets generally want to buy a complete solution from a single vendor, in our experience.
* We believe the enterprise software group is heading into a period of decision gridlock as clients wait for a de facto standard to develop that gracefully addresses the internet. According to our own checks and several third party industry consultants, it appears that ORCL's product offerings provide the best solutions involving the internet. Thus, we believe that the widespread adoption of the internet has created an opportunity that ORCL is particularly well positioned to exploit.
* In addition to Oracle's database technology, the company also has application and consulting services that allow them to provide a whole system solution. We would note that ORCL's database products have become a de facto standard at the higher end of the market and has been able to leverage this market presence toward their other product lines, all of which appear to be at the front end of strong product cycles.
* It appears that Oracle is benefiting from applications development on high-transaction volume web sites. We believe the company should enjoy a sustainable competitive advantage in this segment, given the proven scalability versus Microsoft's (MSFT) SQL server product.
* Management is focusing on the development of their applications business as they attempt to build brand awareness, sales effectiveness, web applications, and greater exposure to the middle market. It appears the focus has turned toward the applications business as ORCL attempts to build a competitive advantage in this area.
* Our 12 month price target of $40 is based on ORCL trading at 1.15x (115%)price/earnings to growth. We believe this valuation is appropriate as it has proven to be a consistent barometer of valuation for Information Technology (IT) services companies. With services now accounting for 55% of Oracle's revenues, we believe this type of valuation may be in order. Assuming growth continues at a 22% rate over our CY99 earnings estimate of $1.29, this implies a multiple of 25x a CY00 earnings projection of $1.57.
This doesn't sound like much of a 'downgrade' to me. Like I said earlier, it sounded more like an adjustment in Pru's rating system and its usage.
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