Will Oracle Corporation (ORCL) Eat Cisco Systems, Inc. (CSCO) For Lunch?

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It’s an audacious idea, but it’s not beyond Oracle’s ability to execute. It started with databases and acquired their applications. Database applications are networked and can easily be translated to telecom networks. Oracle Corporation (NASDAQ:ORCL) already sells to the phone companies in such areas as billing, so why couldn’t it take over the network operations center?

Who Might Win?

Oracle’s stock has been outpacing that of Cisco for years. Over the last half-decade Oracle Corporation (NASDAQ:ORCL) is up 56%, while Cisco shares are actually down 15%. Over the last year it’s up almost 10%, while Cisco is flat. While Cisco sells at about 2.5 times its annual revenues of $46 billion, Oracle sells at closer to four times its revenue. That’s after a stock collapse that saw it drop almost $4.50/share on third quarter earnings that came in behind analyst estimates.

Oracle was pounding the table for better results going forward on its call. Analysts were told that the arrival of new hardware probably slowed sales, and that economic uncertainty caused some slop-over of orders from the third quarter to the current one. If you believe that, Oracle is going to go up, and may gain 20% or more by the time the next quarterly earnings are released.

Cisco Systems, Inc. (NASDAQ:CSCO), meanwhile, is going nowhere fast, and is attractive mainly for its yield and its PE ratio a below-market 12. That’s partly because it’s stuck with the slow-growth telecom market, the same market Oracle is now targeting.

Why would Oracle Corporation (NASDAQ:ORCL) want a market that Cisco Systems, Inc. (NASDAQ:CSCO) is failing to execute in? Because software margins are fatter than hardware margins, and telecom hardware margins can be fatter than those in the general computing market. Oracle Corporation (NASDAQ:ORCL) believes it can sell a host of its fastest servers into the network operations space, turn industry standards into software, and bull its way through Cisco Systems, Inc. (NASDAQ:CSCO)’s moat with the lower prices that result.

They’re right on the technology trend, and we know they can execute on profits once they control industry standards.  I’d say Cisco is in trouble. Watch carefully for its own SDN strategy announcements for your clue on how bad the trouble might be.

The article Will Oracle Eat Cisco For Lunch? originally appeared on Fool.com and is written by Dana Blankenhorn.

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