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Oracle Corporation (ORCL): This Software Behemoth Is Priced for a Meltdown

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Oracle Corporation (NASDAQ:ORCL)The best investment opportunity is one in which a great business is selling for a low price. That opportunity currently exists in the form of Oracle Corporation (NYSE:ORCL). Oracle Corporation (NYSE:ORCL) has become a reliable cash cow that regularly churns out more cash than it reports in Generally Accepted Accounting Practices (GAAP) earnings. Even though its cash flows are predictable, the stock is currently priced so low that shareholders will probably earn at least a 10% annual return over a multi-year holding period.

Best in the world

Oracle Corporation (NYSE:ORCL) is the world’s number one enterprise software provider. Its acquisitiveness has kept competitors at bay while allowing the company to expand its product offering. The acquisitions of PeopleSoft and Siebel enabled Oracle to enter application software, which the company has used to further its entrenchment in customers’ businesses.

Customers have come to rely on Oracle for mission-critical databases and applications. Not only are these products highly integrated into the day-to-day business of Oracle Corporation (NYSE:ORCL) customers, they are also crucial to the success of the customers’ business. Customers are often unwilling to switch to a different provider simply due to price differences because the risk of downtime or integration problems is too high.

As a result of these enormous (and growing) switching costs, Oracle’s cash flows are secure for the foreseeable future.

In addition, Larry Ellison has shown himself to be a prudent capital allocator. The founder and CEO owns 23% of the common stock and has made many shrewd acquisitions, even if they appeared overvalued at the time. The company has repurchased $11 billion in stock in recent years and continues to pay a strong dividend. In addition, it carries ample cash on the balance sheet for acquisitions and continued repurchases.

Competition

The only way for Oracle Corporation (NYSE:ORCL)’s free cash flow to decline is if competition starts to eat away at its market share. Although most of the risk comes from start-ups and smaller software firms in general, the company can easily acquire those companies and count the acquisition as a cost of protecting its moat.

Oracle’s real competition comes from bigger players like SAP AG (ADR) (NYSE:SAP) and International Business Machines Corp. (NYSE:IBM).

SAP AG (ADR) (NYSE:SAP) is a threat to Oracle because of its market position in cloud computing. Although Larry Ellison would say that cloud computing is just a new name for what Oracle already does, SAP’s cloud computing segment represents a significant threat to his business.

SAP’s large installed base of enterprise customers gives the company the same benefit from significant switching costs that Oracle enjoys, and affords it time to build out its cloud services.

SAP AG (ADR) (NYSE:SAP)’s cloud offering includes HANA — a high-speed database and analytics tool that is the company’s key growth driver. HANA is the key differentiator between SAP and Oracle’s offering, but Ellison thinks it is over hyped. The Oracle founder says SAP’s boasts about the rapid adoption of HANA are simply false; he says none of his customers are leaving Oracle Corporation (NYSE:ORCL) for HANA. Meanwhile, Ellison claims that Oracle’s cloud offering is currently on a $1 billion run-rate, which is bigger than SAP’s cloud business.

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