Can Oracle Persevere?

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It’s getting progressively more difficult to look at the strong cash position of database giant Oracle, along with its deep market penetration, and not notice how undervalued the stock is.

As evident by its incredibly low forward price-to-earnings ratio of 10, it seems Wall Street cares very little about its prospects, especially compared to the high multiples enjoyed by rivals such as and EMC. Can Oracle overcome such profound doubt after recent earnings fell short of expectations?

An Un-Oracle-like Quarter

Oracle announced fiscal 2013 first-quarter results that were “un-Oracle-like.” The company reported net income of 41 cents a share on revenue of $8.18 billion. The company missed on both the top and bottom lines as analysts were expecting earnings per share of 51 cents on sales of $8.45 billion. Working in its favor, profit rose 14 percent year-over-year, but revenue shed 2.3 percent from the same period of a year ago — ending its streak of four consecutive quarters of revenue growth.

For its performance, the company’s president and CFO, Safra Catz offered some insight on Oracle’s metrics with this statement in a company press release:

“On a non-GAAP basis, new software licenses and cloud software subscriptions sales grew 11 percent in constant currency and operating margin increased to 44 percent in Q1,” said Catz. "(First quarter) operating cash flow increased to a record high of $5.7 billion. We’re off to a good start in the new year.”

I have to agree that the company is indeed off to a solid start. Impressively, it reported net income of $2.03 billion — representing a 10.5 percent increase from the previous year. Not only was this the third consecutive quarter of increased profits, but over the last five quarters Oracle has averaged almost 18 percent increase in that category. I wonder what else it can do to get Wall Street to care.

Moving Forward

Oracle’s challenge is to prove that it can continue to grow its enterprise footprint. Hewlett-Packard, which recently won its legal case against Oracle over software development and Itanium support resulting in a judgment of $4 billion, certainly won’t make it easy. And other rivals such as SAP and International Business Machines will offer plenty of competition to force Oracle’s and to differentiate itself.

The entire sector is now in consolidation mode with each of the names having gone on a shopping spree scooping up anything with cloud ties. One way Oracle can set itself apart is with its Fusion platform which enables enterprises to not only create but operate smart business applications while making otherwise complex IT tasks more efficient.

I think this is an area that should generate some excitement for investors. But I caution that we not bet the company’s entire future on it — particularly since the company didn’t go into much detail about it during the announcement.

Bottom Line

It’s like pulling teeth to get Wall Street analysts to say something indiscriminately positive about Oracle and its prospects. This is even though these same analysts have bumped up their average estimates for the fiscal year from $2.55 per share 60 days ago to $2.56. The Street has grown more enamored with , EMC , and even suggesting that Red Hat might be a better investment option due to Oracle’s perceived lack of growth.

But the numbers tell another story. In fact, I argue that Oracle’s true value is far from being reflected in today’s prices. Patient investors should be rewarded with a stock that is trading at $40 in the next six to 12 months.

—By Contributor Richard Saintvilus

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At the time of publication, Richard Saintvilus held no position in any of the stocks mentioned.