Fish or Cut Bait: Loving Larry
By Paul R. La Monica
Redherring.com, November 27, 2000
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Please promise not to laugh when you read the next sentence. I kind of feel bad for Oracle (Nasdaq: ORCL) CEO Larry Ellison. What can I say? I guess I'm getting into the whole tidings of joy thing a little early this year. Even though Mr. Ellison is worth several billion dollars more than me and hardly needs my sympathy, my heart goes out to him.
Why sob for an egotistical billionaire? For one thing, the market's reaction to the November 17 announcement that Oracle executive VP Gary Bloom was leaving to become the CEO of Veritas (Nasdaq: VRTS) was preposterous. Oracle's stock fell 14 percent on the news, as investors fretted about the impact of Mr. Bloom's exit. Of course, he was the second prominent Oracle executive to jump ship in the last few months, after former president and chief operating officer Ray Lane, now with venture capital firm Kleiner Perkins Caufield & Byers.
The financial press feasted on this story as if it were a succulent Thanksgiving turkey with all the trimmings. Mr. Bloom's exit gave everyone the chance to dust off their favorite "Larry is a loon" anecdotes and play the role of amateur psychiatrist -- putting the flamboyant Mr. Ellison on the leather couch to try and pinpoint just why he continues to drive his best and brightest executives away. (Tell me about your childhood, Larry.)
One would think that Mr. Ellison was not simply a software company executive, but actually a person to hide your children from -- the Grinch of the technology world. The only thing missing was someone, Mr. Lane perhaps, singing (in a deep baritone voice): "You're a mean one, Mr. Ellison. You really are a heel. You're as cuddly as a cactus, you're as charming as an eel; Mr. Ellison."
SHOULD HE STAY OR SHOULD HE GO?
Larry just can't win. Remember that in last week's election rant, I pointed out that Oracle's stock fell earlier this month because of chat room speculation that Mr. Ellison had left the company (other, more impish posters went so far as to say that Mr. Ellison had actually left the realm of the living).
So let's follow the market's twisted logic. When rumors of Mr. Ellison's demise began to circulate, the stock fell. So an Oracle without Larry Ellison was viewed negatively. Then, when Mr. Bloom announced he was leaving, the stock fell, because investors are worried that Mr. Ellison is assuming too much responsibility and thus alienating all his supposed heirs apparent.
Am I the only one who sees the paradox here? Judging by the market's reaction to the death rumors and the news of Mr. Bloom's departure, it seems investors think that if Larry goes there will be trouble, but, if he stays, it will be double. I'm sorry, but that just won't work.
What makes this even more ridiculous is that the stocks of Oracle's competitors all wound up falling sharply on Monday as well. Granted, the entire market took a tumble on Monday, but some analysts were saying that these stocks fell in sympathy with Oracle. Excuse me, but why on earth should the stocks of companies like Siebel Systems (Nasdaq: SEBL), Ariba (Nasdaq: ARBA), SAP (NYSE: SAP), and I2 (Nasdaq: ITWO) fall because of management turmoil at their biggest competitor? Shouldn't that be good news for these companies? Further illustrating how totally illogical this market is right now is the fact that even Veritas, the company that Mr. Bloom is joining, fell on Monday. What's up with that?
NOTHING'S WRONG WITH ORACLE
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?
MISCELLANY
Given the short week, I've decided not to provide an update about the FOCB and Digital Hollywood Indexes. Besides, it's more of the same. Both indexes are down. Sigh.
However, I do need to give big shout-outs to two readers who answered my latest pop culture query. Janusz Klawender was the first to correctly identify the quote "Always look on the bright side of life" as being the delightfully irreverent musical number in the last scene of Monty Python's classic comedy Life of Brian. And mad props are in order for Allan Donley, who pointed out that the tune was also sung by Jack Nicholson's character in As Good As It Gets.
Anyhow, happy Thanksgiving to all my U.S. readers. May you all enjoy a nice long tryptophan-induced rest this weekend. And to the non-U.S. FOCB fans out there, I hope you continue to find humor in our Presidential election problems. Honestly, what would you do for entertainment without the good ol' US of A? |
