Why Patience Is the Necessary Ingredient to Buy Oracle Corporation

There are signs that Oracle's turnaround is happening, but it's taking longer than many would like. Here's why you need to have a lot of patience to buy Oracle.

Jun 23, 2014 at 4:00PM

Oracle Corp. (NYSE:ORCL) is going through a necessary but painful business transformation, one that is fairly common in the technology sector nowadays. Many companies, including Oracle, are slowly moving away from hardware and shifting their emphasis toward software and services.

This is a costly endeavor, and earnings bear the brunt of these turnarounds. This also takes time, since huge companies like Oracle can't just turn on a dime. Nowhere is this more evident than in Oracle's quarterly reports over the past year.

You may have heard that the cloud is the next revolution within the technology industry. That's likely true, and some companies like Oracle seem to be caught off guard. Oracle is busily trying to catch up by making considerable investments and pursuing large acquisitions to make sure it doesn't fall behind its competitors. For example, Oracle is buying MICROS Systems (NASDAQ:MCRS) for $5.3 billion.

Establishing a leadership position in software and services, particularly in the cloud, is where Oracle is hoping its pursuit of MICROS Systems pays off. MICROS offers software for a range of industries, including retail, restaurants, and hotels. MICROS' services are used in everything from placing orders to making reservations.

Almost touching the cloud
Oracle is a company in transition. It's undergoing a strategic shift in its core business, which should pave the way for a brighter future. That means the present will be challenging, and the last several quarters have been dragged down by lackluster growth and higher expenses.

These same conditions persisted in the most recent quarter. Total revenue increased just 3% in the fourth quarter, while GAAP earnings per share were flat. Revenue and earnings per share both missed estimates, and shares of Oracle slumped 5% after announcing its quarterly results. Not surprisingly, the main culprit was hardware, which posted just 2% growth last year.

However, despite the disappointing numbers, Oracle management was quick to point out progress in its key initiatives. For example, its cloud subscriptions are approaching a run rate of $2 billion per year.

Since Oracle was late to the cloud party, it's using its financial girth as a $178 billion company by market capitalization to try to instantly buy growth. MICROS fits the bill, since revenue increased 10% in the most recent quarter and 7% over the past three quarters.

Oracle's over-arching strategy is to boost its presence in software as a service, or SaaS, and platform as a service, or PaaS. There's good reason for this, since even though Oracle's earnings report underwhelmed on the surface, certain segments showed strength. Cloud PaaS and SaaS revenue jumped 25% last quarter to $322 million, far outpacing Oracle's other segments.

Oracle announced after reporting earnings that it is now the second-largest SaaS company in the world by revenue. Its position will be enhanced further with the buyout of MICROS. Oracle is outperforming in these areas, which represent the future of its growth strategy.

The Foolish takeaway
Oracle's disappointing quarterly results, in which both revenue and profit missed analyst estimates, were a continuation of a disturbing trend. There isn't a lot of evidence that its turnaround is materializing, because the company is still weighed down by a sluggish hardware unit.

Under the surface, however, there are real signs of progress. Oracle is steadily building out its software and services businesses, and there's a chance it can soon establish a leadership position. If it can finalize its takeover of MICROS Systems, that will help speed up the process.

Still, its progress wasn't enough to silence the critics. Oracle handed in a weak quarterly report, and it's looking as though investors are losing patience. Patience is exactly what you will need to buy Oracle at this point.

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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