Why Patience Is the Necessary Ingredient to Buy Oracle Corporation

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.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3004288, ~/Articles/ArticleHandler.aspx, 9/5/2015 6:36:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
MCRS $0.00 Down +0.00 +0.00%
MICROS Systems, In… CAPS Rating: ****
ORCL $36.27 Down -0.63 -1.71%
Oracle CAPS Rating: ****