Oracle Corporation (NASDAQ:ORCL) delivered a poor quarterly report, missing both on earnings and on revenue. The stock was punished. One of the main reasons for the miss was soft cloud subscription growth. Right after the earnings announcement, the company announced cloud partnerships with Microsoft Corporation (NASDAQ:MSFT), salesforce.com, inc. (NYSE:CRM) and NetSuite Inc (NYSE:N).
Would these deals help the stock?
The essence of the deals
Oracle’s database software will now be supported by Microsoft’s Windows Azure platform. This sounds interesting, because Oracle’s new 12c database is one of the main competitors to Microsoft’s SQL Server database. It seems like Microsoft does not want to limit the reach of Windows Azure. At the meantime, the company is ready for free competition with Oracle. Oracle, which struggles to produce growth that would impress investors, gets the possibility to attract a wider customer base.
Salesforce relies on Oracle Corporation (NASDAQ:ORCL)’s database for its operations. Salesforce CEO Marc Benioff has stated that the nine-year deal will cut database server costs in half. The companies’ apps would be able to share data with each other, making it easier for customers to use solutions from both companies. Oracle promised to leave Salesforce’s Customer Relationship Management (CRM) system in place when Oracle buys a company which already employs one.
Oracle’s partnership with NetSuite will help deliver integrated cloud offerings for mid-sized businesses. These offerings would feature Human Resources (HR) software from Oracle and Enterprise Resource Planning (ERP) software from NetSuite.
Bearish for NetSuite
Oracle Corporation (NASDAQ:ORCL) faces significant headwinds from the economy. The cloud is not growing as fast as investors may have hoped. The company is trying to push its product offerings as far as it can. Although these moves seem good for Oracle, they can be seen as a warning sign. When the market is growing fast, companies do not bother bargaining with each other and getting partnership. The big ones just buy the small ones.
Among these four companies, only NetSuite can be seen as a relatively small company. In fact, with a market cap reaching $7 billion, “small” is an awkward word to describe NetSuite. If we look closer at NetSuite, we can see that the stock market is the source of the capitalization, not the business itself. The rise of the share price has pushed the company’s forward Price Earnings (P/E) multiple to an astronomical 216. With the economic dynamics we currently see, I cannot imagine the growth that must happen to justify the share price.
There is only one thing that NetSuite investors can count on. If the company is bought at a premium to the market price, investors would be happy. Recent Merger & Acquisition ( M&A) activity spurs hopes for such a scenario. If we assume a moderate 35% premium for NetSuite, this would mean that someone would have to pay as much as $10 billion. Who can afford this?