[OFF TOPIC - ORACLE]
Plugged In: Delphic Signals
By Eric J. Savitz - Dow Jones News
It's awfully tempting to jump to the conclusion that Oracle's stock has become a huge bargain.
The stock has absorbed a vicious beating; now trading at around $20, the shares have lost more than half their value since peaking at $42 and change in August, Barron's reports. The bulk of the selloff, you might recall, happened in early December, a 29%, one-day implosion that followed the announcement of shockingly weak earnings for Oracle's fiscal second quarter, ended November 30. And this dead cat hasn't bounced an inch.
To refresh your memory: Oracle, the leader in relational database software, earned 19 cents a share in the quarter, up just a penny from the year-earlier quarter, on a 23% rise in revenues. Profits came in four cents below expectations. Database revenues, the heart of Oracle's business, rose a paltry 3%. Oracle blamed the weak results on the economic situation in Asia in general, and the weakening of Asian currencies in particular, as well as slower-than-expected orders from U.S. telecom companies. Over the past five years, Oracle has all but buried its competitors in the database business, revenues compounding 37% a year. Not now.
Carolyn DiCenzo, database industry analyst at Dataquest, sees four factors hurting Oracle. For starters, Oracle is suffering the effects of the Asian slowdown. At the same time, she adds, the company has been undergoing a major sales reorganization, partly in an attempt to compete more effectively at the low end of the database market, where Microsoft has had the most success. DiCenzo notes that Microsoft sells indirectly, through value-added resellers, or VARs, while Oracle has focused on its own sales force, which is "too expensive for smaller accounts." The third factor, which affects Oracle and its competitors alike, is that relational databases have been commoditized. In response, DiCenzo says, Oracle, Informix and Sybase have been segmenting their products, "reducing the price for core technology but getting incremental revenues from value-added modules." DiCenzo says that approach should help the companies this year, but warns that it doesn't change the fact that "the core technology has become a commodity."
Finally, DiCenzo notes that Oracle, to its credit, has been diversifying its revenue stream away from basic database software to rely more heavily on both services and applications. In the applications business, a more recent initiative, Oracle has had more success in some markets than others
-- witness its recent overestimate of demand in the telecom market. Overall, DiCenzo sees demand for database software growing 11% a year over the next five years, with stronger demand for Windows NT-based systems, slightly lower growth for Unix machines, and zero growth for mainframes.
Can Oracle return to 30%-plus growth in that scenario? It won't be easy. Contrarians might be tempted to jump on Oracle shares at this point. According to Zack's, 20 of 28 Street analysts who track Oracle now rate the stock a "hold," which is about as low a rating as you'll see for any company not on the verge of full-scale collapse. The consensus earnings estimate for Oracle's fiscal year ending May 1998 now stands at 92 cents --
less than the Street had once expected, but still up from 81 cents in fiscal 1997. The early betting for fiscal 1999: $1.14 a share.
Oracle Grew 23% In Third Quarter
At the current price, Oracle trades for about 22 times expected fiscal 1998 earnings, 17 1/2 times projected fiscal '99 results. Even in the weak third quarter, remember, the company grew 23%. And though Oracle faces increased competition from Microsoft's SQL Server line, Oracle's other chief rivals, Informix and Sybase, have even bigger problems than Oracle. Just last week, Sybase disclosed that it has discovered revenue recognition problems at its Japanese subsidiary, requiring the restatement of earnings for the first three quarters of 1997, and resulting in a larger-than-expected fourth-quarter loss. Messy shareholder litigation to follow.
No doubt, you can make the case that Oracle looks statistically ncheap. So should you take a flier? Not yet, advises Roger McNamee, partner at Integral Capital Partners in Menlo Park, California. "I am very concerned that Oracle's current strategy -- 30% growth and continuous head-on attacks against Microsoft -- is not achievable," McNamee says. "As an investor, I would be much happier if Oracle were to accept a lower growth rate, boost its profitability, and find a way to peacefully coexist with Microsoft. This is a big test for management. While Oracle's stock has come down dramatically, it is only cheap if the company adopts a strategy that produces sustainable and predictable growth going forward. |
