Is Oracle A Screaming Buy?

Oracle Corporation (NASDAQ:ORCL) was one of the most popular technology stocks among hedge funds and other notable investors during the second quarter of 2012, according to our database of 13F filings (see the full list of the most popular technology stocks). Seth Klarman’s Baupost Group initiated a position of nearly 16 million shares in Oracle between April and June; this made it the third largest holding by market value in the fund’s 13F portfolio (find more of Seth Klarman’s stock picks). Oracle was also one of billionaire Ken Fisher’s favorite stocks, as his Fisher Asset Management reported a position of 20 million shares at the end of the quarter (research more stocks that Fisher Asset Management owned). The database software and management company’s stock price is up 20% on the year, edging the return of the NASDAQ index.

BAUPOST GROUP

In Oracle Corporation’s most recent fiscal quarter (the first of its fiscal year; the quarter ended in August), revenues were down 2% from the first fiscal quarter of last year. Growth in software- the company’s largest source of sales- was offset by a decline in hardware systems. However, an impressive cost-cutting program has brought operating expenses down 7% over the same period, and that includes a 14% increase in research and development (which could be considered a good investment for a technology company). With share count down as well (about $3 billion was used to buy back stock in the quarter), earnings per share for the third quarter of 2012 were 41 cents, up from 36 cents in Q3 2011.

Perhaps surprisingly given its successful business performance and its market capitalization of nearly $150 billion, Oracle Corporation only trades at 15 times trailing earnings. We think that this is too low for what we see at the company. Sell-side analysts expect continued earnings growth at the company, both in 2013 and over the next several years: their consensus estimates imply a forward P/E multiple of 11 and a five-year PEG ratio of 1.

Large enterprise software companies such as Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM), SAP AG (NYSE:SAP), and salesforce.com, inc. (NYSE:CRM) make good peers for Oracle. salesforce.com has fairly low net income in comparison to its stock price, and trades at 74 times forward earnings estimates even with Wall Street consensus showing considerable earnings growth in the next year. About 13% of the shares outstanding are held short, and while we’d be careful to go short such a fast growing company (revenue was up 34% last quarter versus a year earlier) we don’t think that it’s a good buy either. SAP also looks expensive, with trailing and forward P/E multiples close to 20. Its earnings were down sharply in the third quarter compared to the third quarter of 2011 as well; even with good top-line numbers, we’d avoid the stock.

IBM seems to have done well at transitioning somewhat from hardware to software- its earnings were flat in its most recent quarter compared to the same point in the previous year, a much better result than what we have been seeing at many hardware companies- yet the market does not look very optimistic about the stock. It trades at 14 times trailing earnings, a slight discount to Oracle. Its forward P/E is also close to where that company is valued. Given that Oracle is seeing better earnings growth, possibly because its software/services/hardware mix is still more favorable, we would prefer it. Our attitude towards Microsoft can be characterized as “wait and see.” Its forward P/E of 9 is appealing, but we know that at least some of that pricing is due to the expectation that the company will see a temporary bump to its business as consumers buy the new versions of Windows and Office. With Windows 8 and Surface both serving as potential minefields for the company, we’d be prepared to buy Microsoft if the stock takes a dive upon any bad news.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!