Should Investors Be Patient With Oracle?

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A stock that experiences a tough quarter or two can be forgiven. These are no easy economic times, after all, so it's usually wise to give a company time to turn itself around. When disappointing business results persist for consecutive quarters, though, there may be deeper fundamental issues that should be taken seriously. This is exactly what may be at play with Oracle (NYSE: ORCL  ) , whose poor results in recent quarters and inability to see light at the end of the tunnel may have investors worried.

Software and subscriptions under scrutiny
Investors closely watch Oracle's sales of software and Internet-based subscriptions, and for good reason. These are seen as a great indicator of Oracle's future health, as new software sales and subscriptions generate long-term, high-margin contracts for the software giant. Over the past year, Oracle has woefully underperformed on this metric, and investors were eager to see improvement.

Fortunately, there's good news on that front. Coming in to this quarter's results, Oracle had missed forecasts for software sales and subscriptions for two quarters running. Oracle booked 4% growth in software sales and subscriptions in the first quarter, right in the middle of its previously stated expectations, so measurable progress was clearly made.

A less-than-bright future
However, making things difficult for shareholders is that Oracle's near future isn't expected to show much improvement. Management provided vague expectations for the current quarter's software and subscription results, guiding investors to a wide range, of a 4% revenue decline to as much as a 6% increase. That isn't exactly reason for investors to celebrate.

And, more broadly, investors are right to be disappointed by Oracle's stagnant revenue. Sales rose by just 2% in the first quarter. It's true that earnings per share climbed strongly, up 14% year-over-year, but that mostly reflects the benefits of cost cuts. Operating income was actually down in the quarter, and rising profits can only be sustained without equal contributions from revenue for so long.

Plenty of tech stocks in the sea
Oracle is in the middle of a business transition, in which it is shifting its business to offer more cloud computing solutions. Unfortunately, the reality of the slow-growing global economy makes it extremely difficult for technology companies to engage in turnaround efforts.

Oracle is a highly profitable business and is likely to continue improvement in the months ahead, but as an investment, there don't appear to be many reasons to buy the stock. It's not terribly cheap, even with its current issues: The stock trades for about 15 times trailing earnings, no bargain within the technology landscape. Other tech stocks, including Cisco (NASDAQ: CSCO  ) are actually more attractively priced. Cisco trades for just 13 times trailing earnings, and also offers investors a 2.8% dividend, much better than Oracle's payout. Plus, Cisco's been a much better performer over the past year. Cisco booked 6% revenue growth in both its latest quarter and in fiscal 2013.

Or, investors could consider smartphone chip maker Qualcomm (NASDAQ: QCOM  ) for its superior growth. Over the first nine months of the year, Qualcomm has booked 27% operating income growth, due largely to impressive 29% growth in total revenue over the same time period. Investors are paying a higher price for Qualcomm, 18 times trailing earnings at recent prices, but it's for good reason. Qualcomm is simply dominating the mobile chip market, and with future growth in computing clearly in mobile devices, Qualcomm's future is bright.

In short, there are plenty of technology stocks that offer value, income, growth, or some combination of these qualities. Oracle is a strong business and is likely to emerge from its struggles, but investors aren't given enough confidence as to when that will be to warrant new investment. Investors with an eye for growth and yield in the technology sector should set their sights on Cisco and Qualcomm.

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