Oracle Reports Strong Earnings, But the Good Times May Not Last


Shares of Oracle (ORCL) moved higher on Wednesday after a better than expected quarterly report.

The business software giant has now exceeded expectations in three of the past four quarters. But the business itself is a mixed bag.

Adjusted earnings soared 18 percent, to $0.66 a share, well ahead of the $0.61 a share that analysts were targeting. Yet despite an 18 percent boost in new software licenses and cloud revenue, and an 8 percent uptick in software license updates and product support revenue, Oracle's top line only mustered a 3 percent gain.

Yes, Oracle is moving in the right direction -- but is it moving fast enough to justify its valuation?

It's a New World

Life was easy when Oracle was merely a database software behemoth, trading blows in enterprise software with Germany's SAP (SAP) and IBM (IBM).

If there were any threats or slowdowns, CEO Larry Ellison -- far and away one of the cooler tech CEOs on the planet -- would just buy his way out of the setback.

Oracle is a serial acquirer. There's even a page on its website devoted to chronicling the nearly 90 companies that it has snapped up over the past few years. The purchases are important to keep in mind. When Oracle's revenue growth is unimpressive, it's safe to assume that organic growth is even worse.

Sponsored LinksAs technology changes and Oracle finds itself acquiring cloud computing speedsters and business intelligence providers, it's suddenly not alone.

Other tech giants are starting to raise their bidding cards. Dell (DELL) and Hewlett-Packard (HPQ) are no longer happy being PC makers, so they're snapping up storage and enterprise software companies. This is making it harder for Oracle to make needle-moving acquisitions at good prices.

In short, everyone's crashing the party that Oracle though it had all to itself.

Hey, You, Get Off of My Cloud

If 3% revenue growth isn't up your alley, check out what some of the leaders of the cloud computing revolution are doing. Poster child (CRM) and recent IPO Workday (WDAY) are at the more tantalizing early stages of their growth cycles. Analysts see Salesforce growing its revenue by nearly 35 percent this fiscal year. Workday is moving even faster. Wall Street pros see a 57 percent pop on its top line next year.

Oracle isn't ignoring cloud computing. It's been making deals to get more skin in the game. Cloud computing -- where companies go for more conveniently portable server-stored software solutions over PC-tethered old school applications -- is the future. Unfortunately, this future is also cheaper.

Big tech companies are taking advantage of the soft economy to bundle their services, and Oracle's a name found on the Rolodexes of many IT departments. The rub here is what the future will look like. Even if Oracle can keep up with new technologies, the lower-priced nature of modern solutions is a road that will ultimately hurt top-line growth.

Show Me the Money

Oracle's balance sheet is in a good place. The company closed out its latest quarter with $34 billion in cash and marketable securities.

More acquisitions? More buybacks? The company turned heads by paying out its next three quarterly dividends this month, so investors shouldn't be expecting a distribution until late next year.

Oracle's steady growth, growing profitability, and piñata full of cash should be comforting to investors. The company isn't going away anytime soon. Despite the likelihood of growing its revenue in the single digits, trading at 13 times this fiscal year's projected profitability isn't ridiculous.

However, we're getting to the point where Oracle may not be able to buy its way into meaningful growth in the future. The playing field is level to give upstarts a chance, and many new companies are taking advantage of the possibilities in disrupting the giants.

Motley Fool contributor Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle and has the following options: long JAN 2013 $50.00 puts on Motley Fool newsletter services recommend and International Business Machines.

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