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Oracle Corporation (ORCL), Microsoft Corporation (MSFT): A Great Tech Giant Is On Sale

Oracle Corporation (NASDAQ:ORCL) is one of the leading providers of enterprise solutions, and their products include software, services, and hardware. After a recent disappointing earnings report, shares of the company plunged 12% in a matter of days, and is currently well below its 52-week high. Is this a chance to get into a great company at a bargain, or is there more pain ahead?

The majority (70%) of Oracle Corporation (NASDAQ:ORCL)’s revenues comes from software, with the rest coming from hardware (17%) and enterprise services (13%). Recently, the company has been focusing its efforts on developing software-as-a-service products, and has made several strategic acquisitions to support this. In just the past year, Oracle has acquired cloud-computing companies RightNow and Taleo for a total of $3.4 billion, and has purchased Eloqua for $900 million.

The hardware segment has been a major reason behind Oracle Corporation (NASDAQ:ORCL)’s declining revenues and margins; however, over the next few years, the software segment is expected to grow sufficiently to increase revenues and margins over the next few years.


After the recent drop, Oracle Corporation (NASDAQ:ORCL) certainly looks very attractive at just 12.9 times forward earnings, a huge discount to both its historical average (about 15) and its peer group average (about 19). An additional factor is the $17 billion or so of net cash (cash minus debt) on Oracle Corporation (NASDAQ:ORCL)’s balance sheet, and after backing this cash out of the calculation, the forward P/E actually drops to 11.5.

For the current fiscal year, Oracle is expected to earn $2.69 per share, taking into account the lowered expectations, and this is expected to grow to $2.94 and $3.21 in 2014 and 2015, respectively. This corresponds to annual earnings growth of 9.3% and 9.2% over the next two years, which is incredibly cheap for a company that trades at such a cheap multiple.

Oracle competes with other enterprise solutions providers such as International Business Machines Corp (NYSE:IBM), which trades at a slightly higher valuation of 12.7 times forward earnings, with lower growth expectations. International Business Machines Corp (NYSE:IBM) also does not have quite as favorable of a balance sheet, with $11.5 billion in cash and $24 billion in debt. Although IBM markets itself as a one-stop shop for enterprise solutions, I don’t view it as much of a threat to Oracle right now. Oracle has a very loyal customer base and its new acquisitions should allow it to develop a line of products that are unmatched by its peers.


The most logical alternative to a company such as Oracle is another large software company, such as Microsoft Corporation (NASDAQ:MSFT), which has also been trading at a lower price lately, as the release of Windows 8 was not well-received by the market.

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