Follow-Up: A Return Visit to Earlier Stories
ORACLE CHIEF EXECUTIVE LARRY Ellison is taking a victory lap this week at Oracle OpenWorld, his company's big sales conference in San Francisco. After successfully deploying his controversial takeover and consolidation strategy ear lier this decade-against a barrage of naysayers - his giant software company finally has been re,nu:ded handsomely for its efforts: Oracle shares are up more than GOo/c, to $18.94,Jrom their 52-week low of nearly a year ago.
The stock could get another lift in com ing weeks, ,vith analysts predicting a hefty 38% earnings jump in the quarter ending Nov. 7, to 22 cents a share, thanks in part to a weak year-earlier period. Over the next 12 months, some Ellison fans say, the shares should climb 20% to 25%. That would leave it far ahead of where it stood when we laid out Oracle's leading role in the software industry's consolidation ("Soft Sell," Aug. 29, 2005) and followed up with a positive piece on Oracle's shares after the $5.9 billion Sie bel deal ("Will Oracle's Win Aid Stock?," Sept. 19, 2005).
There are, however, some real risks.For one thing, the benefits from Oracle's big acquisitions of PeopleS oft and Siebel Systems now look priced into the stock. While fans bet on Ellison doing another successful deal, he might also do a ques tionable one, hurting the shares at least temporarily. Speculation has centered on developers of so-called business-analytic software, which helps corporations track their performance. But these companies, such as Business Objects (BOBJ) and Hyperion Solutions (HYSL) are relatively expensive and thus could take longer to fuel growth.
Cowen & Co.'s software analyst, Pe ter Goldmacher, thinks that Oracle should look for on demand software companies, such as WebEx (WEBX), which provides Internet conferencing and instructional ser vices. Trusting that Oracle ,vill go for sen sible deals, he sees the stock hitting the low 20s in 12 to 18 months.
Acquisitions aren't the only issue for investors. It may be getting harder to tell exactly where the enterprise-software leader gets its gJ.'ovith. While the com pany posted a blowout Augnst quartel~ some analysts maintain that revenue from software applications - a prox-y for the success of the PeopleSoft and Siebel deals - has been inflated by the inclnsion of some revenue from Siebel "middle ware," integJ.'ation software generally con sidered distinct from an application. If that's true, favorable judgments on the acquisitions may need some revision.
And, if following the money is a smart course. Oracle President Charles Phillips recently gave investors cause fo~' COLeern. On Oct. 6, he exercised options and sold 1.87 million shares, for a ne: pre,fit of about $13 million, according te' research firm InsiderScore.
When Phillips, a former enterprise somq'J'e analyst, left his cozy perch at Morgan Stanley in 2003 to help Ellison with his takeover spree, many on Wall Street thought he was crazy to take a man agement job in the seemingly moriblmd enterprise-software indnstry. Phillips was crazy like a fox, judging by this month's payout. Plilllips declined to comment.
While the stock now has more yellow flags than investors might like, the com pany's business does look to be on the rise. Initially, enstomers of PeopleSoft and Siebel were uncertain about Oracle's commitment to improving products. Now that Oracle has shown a resolve, customers are loosening their purse strings. Re sult: Some observers see revenues growing by about 20% in the fiscal year ending next May.
That has clearly helped the shares. "Oracle is being rewarded right now for a thoughtful and well-executed merger and acquisition strategy," Goldmacher says.
Oracle probably can cut some more costs over the next couple of years and, in 2008, it should get a boost from Fusion, its next-generation enterprise software. Fu sion will meld all the applications Oracle has created and acquired into one brand.
Oracle's stock, meanwhile, looks attrac tive compared with that of SAP, the Ger man software maker. Even after far out pacing SAP's shares (SAP) this year, Oracle trades at about 19.5 time estimated year-ahead earnings, versus 23.5 for SAP.
Oracle's stock probably won't repeat this year's surge anytime soon. But, if Elli son steers clear of dumb deals and the corporate software market holds up, in vestors could still have reason to cheer.- MARK VEVERKA
