Few fields move as rapidly as technology. Businesses creating outsized profits and returns for shareholders quickly get a bull's-eye painted on their back as they become targets of other companies looking to disrupt their products by selling cheaper alternatives that still prove "good enough." Not only that, but even if a company continues to dominate its particular field, other changes in technology can shift spending away from their products. Think about how Microsoft still dominates PCs but feels pressure from the sales shift toward mobile devices such as smartphones and tablets.

With that in mind, today we're looking at how Oracle (Nasdaq: ORCL) innovates. 

Technology companies can innovate either through acquisitions or by spending more money on research and development. We'll compare Oracle's spending in these areas with that of its closest peers and assess whether the company is investing enough in its future.

Research and development
Over the past five years, Oracle has spent an average of 12% of revenues on R&D. The following table summarizes how Oracle's R&D expenditures relative to revenues compare with some of the company's closest peers.






















salesforce.com (NYSE: CRM)







Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years; yearly total is for company fiscal years closing in that period.

Oracle's been increasingly aggressive in its determination to offer a full suite of services that includes hardware across the enterprise. You'd expect that R&D expenditures as a percentage of sales might have slowed after its acquisition of hardware-heavy Sun, yet in the past 12 months, the company has spent nearly 13% of sales on R&D.

Cloud computing poses a threat to Oracle's central strengths, and companies such as salesforce.com are looking to expose this area of weakness by targeting startups that are more receptive to treating IT costs as a recurring service, rather than investing in significant infrastructure costs. Aside from continuing to fund high amounts of R&D for hardware initiatives such as its Exadata machine, Oracle will also need to spend to continue developing cloud-based software alternatives to companies such as salesforce.

In technology, some of the best companies have turned growth through acquisitions into an art. IBM has adeptly spun off capital-heavy businesses such as the hard-drive and PC segments, while it focused on acquiring additional services and software expertise that have transformed its business model.

On the opposite end of the spectrum, Hewlett-Packard is often criticized for underinvesting in R&D, to the point that it has to overpay on acquisitions to catch up with its competitors.

Investors should remember, most of all, that companies are valued by the cash flow they can bring in for their shareholders over time. If companies need to continue making purchases in perpetuity to keep growing, that amounts to a reduction in cash flows, and investors should treat acquisition spending as a continuing outflow against cash flow.

Let's take a look at Oracle's free cash flow over the past five years against cash spent on acquisitions.

Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years; yearly total is for company fiscal years closing in that period.

Oracle has shown extremely strong cash flow in recent years, even though it's been highly acquisitive in its quest to dominate in different enterprise-heavy application softwares. Even after its pricey targeting of Sun, the company has aspirations to equal the breadth of offerings from key competitors such as IBM by making increased acquisitions into areas such as storage.

Final thoughts
Oracle has been very aggressive in moving into new markets and has emulated IBM's model through its purchase of Sun. However, the company still has a way to go before it can provide the breadth of offerings that approaches Big Blue's capabilities. Keeping that in mind, I wouldn't be surprised to see the company grow its offerings through even more bolt-on acquisitions in the coming years.

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Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Microsoft, Oracle, and IBM. Motley Fool newsletter services have recommended buying shares of and shorting salesforce.com and have also recommended buying shares of and creating a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days. 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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