Though it's had a grand 2006 thus far, Oracle (NASDAQ:ORCL) stock has hit a rough patch recently, down about 13% since November. But could this price dip be an opportunity for investors in 2007? Let's take a look.

Challenges to overcome
No doubt, Oracle is the dominant player in the enterprise database business (an estimate from Gartner has its market share at 49%). But competition is getting tougher, such as that from Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM).

Another threat: open-source databases. Open-source software is software developed by a global community of programmers, which is done through the Internet. For the most part, there is no license fee for this type of software. And, yes, there are serious database players, such as Ingres and MySQL.

Realizing the threat, Oracle has been trying to create confusion in the open-source marketplace. For example, the company purchased some open-source providers, like Sleepycat.

What's more, open source is a threat to Oracle's middleware business (this is software that connects two systems, such as a server with a database). For example, this year Red Hat (NASDAQ:RHAT) purchased the dominant open-source middleware player, JBoss.

But Oracle had a brutal response; the company offered to provide cut-rate support for Red Hat's services, which resulted in a plunge in that company's stock. Interestingly enough, the scuttlebutt is that Oracle did this to make it cheaper to ultimately buy out Red Hat.

Opportunities in 2007
Of course, expect Oracle to buy more companies. But the deals are likely to remain small (below $1 billion).

Also, expect it to focus on certain industry "verticals." This has been an effective strategy, as seen with its acquisition of Retek. The deal provided Oracle with lots of traction with retail customers.

In fact, Oracle is now doing the same in financial services, such as with its transaction for i-flex. There is also the move into telecom with the acquisitions of MetaSolv (NASDAQ:MSLV) and Portal Software.

Moreover, the firm should benefit from a major trend in information technology (IT) in that customers want fewer vendors. Simply put, there is much value in having applications and databases that work together seamlessly.

Because of its $19 billion in acquisitions over the past few years, Oracle now has a broad product offering. This should mean bigger wallet share per customer (known as chubby deals). For example, a transaction may be a mix of database, middleware, and business applications.

Quick valuation
Despite a 44% year-to-date return for shareholders, Oracle's valuation is actually in line with its peers. Here's a look:

Price-Earnings Ratio

Enterprise Value/Sales

Enterprise Value/EBITDA













The Foolish bottom line
Going into 2006, there was certainly much skepticism about Oracle's major acquisition strategy. But it is starting to gel, and investors are responding accordingly.

True, it is unlikely the stock can repeat its 2006 performance. But the fact remains that the company is well-positioned in databases, middleware, and business applications. In all, these segments generated cash flows of $4.7 billion during the past 12 months. And expect the cash flows to continue into 2007 as Oracle upsells its massive base of 235,000 customers.

For further Foolishness:

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 758 out of 17,523 in CAPS . Microsoft is an Inside Value pick. The Fool has adisclosure policy.