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Oracle Corporation (ORCL): Does Its Recent Entry in Cloud Computing Makes this Tech Giant a Good Buy?

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With the advent of cloud technology, more and more IT customers are shifting from in-house solutions to cloud based and open platforms. All the major companies in the technology sector have already increased their presence in the cloud domain. Oracle Corporation (NASDAQ:ORCL) and Hewlett-Packard Company (NYSE:HPQ) had been the laggards in this front, but now they too have started moving into the cloud domain.

Oracle CorporationOracle Corporation (NASDAQ:ORCL)’s last quarter results were below the consensus estimate. The drag was due to the drop in the demand for its hardware and renewals. To offset this the company has aggressively started venturing in the cloud platform with its recent acquisition of a cloud based company. During its recent earnings call-conference, President Mark Hurd said that Oracle has added 500 cloud computing customers. The stride in cloud computing will help the company increase its revenue in the coming quarters.

In addition to acquisition in cloud space, the company is also forging alliance with other major players in the industry. The company has recently announced its alliance with Microsoft Corporation (NASDAQ:MSFT). Oracle Corporation (NASDAQ:ORCL)’s offerings will be available in Microsoft Corporation (NASDAQ:MSFT)’s cloud infrastructure. This will help the company increase its software license sales in the coming quarter. Oracle has also announced its alliance with salesforce.com, inc. (NYSE:CRM). Their alliance will help both Oracle and Salesforce.com provide their offerings in tandem to the customers. These strategic alliances will help Oracle increase its software and hardware sales.

With the advent of cloud and mobile, we believe the demand for hardware and software licenses will decrease. The customers are going for cloud based applications and servers, thereby reducing the fixed cost associated with the installation of hardware and software at their work place. This frees a lot of cash for the customers, which they can use to expand their core business. We believe this trend will further gain momentum in the coming year. Seeing this trend, Oracle Corporation (NASDAQ:ORCL)’s move to explore the cloud business makes sense. We believe with strong software and hardware offerings it will be able to get good market share in cloud computing.

Peer analysis

Oracle Corporation (NASDAQ:ORCL)’s trading at the lowest forward PE in its peer group despite it having the highest operating margins. Clearly, the market is not giving it much credit for the recent steps it has taken to enter into cloud computing space. Its immediate peer, SAP, which has a relatively strong position in cloud computing, is trading at a significantly higher PE multiple than Oracle. We believe this valuation gap will narrow over time. Lets take a look at its peer companies.

Company P/S ratio Op. Margin 1 yr. Fwd. P/E
IBM 2.12 21.05% 10.65
Oracle 4.21 38.55% 9.51
SAP 4.17 28.35% 18.65

SAP AG (ADR) (NYSE:SAP) has announced strong first quarter results. The company’s revenue increased by 7% compared to the same period in 2012. The company’s software and cloud subscription increased by 23% in the first quarter compared to 2012.

We believe the company’s new software, HANA, cloud subscription and mobile will drive the future growth. The company’s guidance for the full fiscal year remains strong.

The company recently announced the acquisition of hybris, which will help SAP AG (ADR) (NYSE:SAP) deliver e-commerce platforms either on premise or through cloud deployment. We believe that at its current price and with its future growth strategy the company’s stock is worth buying.

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