(07/10/13) It's Not So Bad in Oracle-land

Although Wall Street loves to beat up on this tech stock, we think the firm is poised to deliver over the coming year, says technology sector specialist Paul McWilliams, editor of Next Inning.

The bears who love to take jabs at Oracle (ORCL) founder Larry Ellison are dithering from reality to launch a good sucker punch when they suggest the model is broken.

Not everything is perfect in Oracle-land, but I don't think it's nearly as bad as the recent stock price weakness implies it is.

While ORCL again fell slightly short of the midpoint of its recent revenue guidance, it delivered non-GAAP earnings in line with the 87-cent consensus estimate. Had it not been for the strength of the US dollar against some currencies like the Japanese yen during the last quarter, ORCL would have reported non-GAAP earnings of 88 cents.

Hardware, which has been my big concern, actually appears to finally be showing some modest traction, and ORCL promises it "will" grow hardware revenue this year.

Things aren't perfect in software either, but I think the issues there are more related to currency exchange rates and macroeconomic weakness in some areas than a systemic problem with ORCL's business model. While it's been a long time since we've seen it, the US dollar has gained value against some other currencies, with the most notable being the yen.

Contrary to some of the headlines I've read, ORCL seems to be building solid traction in Software as a Service (SaaS), growing there faster than its primary competitors. While trends in how software and software services are billed may change during the coming years, we've seen ORCL adapt to change in the past, and come out better than it was before.

ORCL's free cash flow (FCF) for the year was $2.80 per fully diluted share, or about 5% above non-GAAP earnings. ORCL has consistently delivered FCF in excess of non-GAAP earnings during at least the trailing eight quarters.

ORCL committed to put its excess cash to work by doubling the quarterly dividend to 12 cents starting this July, and using $12 billion to buy its shares on the open market.

Bottom Line: While there is nothing to suggest ORCL won't deliver earnings this fiscal year in line with the $2.92 consensus, I'm going to take a bit more cautious view and lower my estimated full-value price range to $36 to $42.

I've seen ORCL fall out of favor plenty of times in the past, and given the way Wall Street likes to beat the company up at the first sign of a blemish, I wouldn't be surprised to see the stock drift down into the high $20s before catching some support. If it breaks $28, I'll probably add some shares to my personal account.

Meanwhile, I have speculated that an agreement between Salesforce.com (CRM) and ORCL would dispell rumors that CRM would switch from ORCL to the open-source PostgreSQL data base.

As it turns out, not only is that threat off the table, it appears CRM will adopt the full ORCL ecosystem. This is a huge win for ORCL, and a very good deal for CRM. For ORCL, it will shut down the pundits that have been claiming new open-source alternatives are going to derail ORCL's business model.

It also benefits ORCL's brand name and lends more credibility to the ORCL ecosystem design. For CRM, it opens new market opportunities, and at least in theory, improves its customers' user experience.