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Analyst Blog

Shares of Oracle Corp. reached a new 52-week high of $41.43 on Monday, Mar 31, 2014, following Gartner’s report that it replaced International Business Machines as the #2 software maker in 2013.

The closing price of Oracle on Mar 31 was $40.91, representing a strong one-year return of about 26.2% and a year-to-date return of about 8.1%. The S&P 500 jumped 19.9% and 2.2%, respectively, during the same period.

Oracle delivered a positive earnings surprise of 1.4% over the past four quarters. This Zacks Rank #3 (Hold) stock has a market cap of $177.96 billion and long-term expected earnings growth rate of 11.2%.

Key Growth Catalyst

According to market research firm Gartner, Microsoft was the #1 software seller in 2013, followed by Oracle and IBM. Oracle’s total software revenue was $29.6 billion and its global market share was 7.6%.

Although Oracle reported modest third-quarter results, the company’s growth prospects in cloud and Big Data are encouraging. Engineered systems (Exadata, Exalogic, Exalytics, Big Data Appliance and SPARC SuperCluster) grew more than 30.0% (on a constant currency basis) in the third quarter and currently accounts for approximately one-third of hardware product revenues.

We believe the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth, going ahead. Moreover, higher subscription revenues are expected to provide a recurring high-margin revenue base, going forward. Additionally, improvement in sales force hiring rate will continue to boost bookings.

However, increasing investment on sales force will put margins under pressure in the near term. Further, intensifying competition from the likes of Salesforce.com is a major concern. Salesforce.com moved up a couple of places to #10 in Gartner’s study and posted the highest year-over-year revenue growth among the top ten vendors.

Estimate Revision

The Zacks Consensus Estimate did not undergo any change. Over the past 7 days, earnings estimates for the fourth quarter, fiscal 2014 and fiscal 2015, remained steady at 92 cents, $2.78 and $3.03 per share, respectively.

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