Quiz time. What is the world's top-seller of business software? If you guessed Microsoft, you were wrong. The answer is Oracle, which in 2007 also had the world's best-paid chief executive. Co-founder Larry Ellison took home $193 million last year.
Ellison earned his reward by taking a huge risk that has paid off. He decided to transform Oracle (symbol ORCL) from a company that mostly sold database programs to one that sells many different kinds of software used in all kinds of industries, from energy to insurance. In less than four years, Ellison has strung together a vast array of specialty software makers, buying 42 companies for upwards of $30 billion. His best-known quarry: PeopleSoft, Siebel Systems and, most recently, BEA Systems.
A former Oracle employee who's impressed with the growth strategy is Peter Goldmacher, who now follows the Redwood Shores, Calif., giant for investment bank Cowen and Co. Says Goldmacher: "People were very skeptical. Ellison bought up companies past their prime when no one else cared. Now, Oracle offers so much more to its customers."
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Goldmacher says that Oracle's sum is greater than its parts because owning so many products allows it to save money on sales, marketing and distribution -- among the top cost centers in the software industry. "Oracle customers can now buy a larger variety of products, leading to significant profit margin expansion," he says.
Oracle's shopping spree has made it the top seller of databases used by computer networks and products that allow computers and software to interact. Ellison says he also wants Oracle to be the leader in its third main product category, "enterprise" software for the business world. Those are the vital applications that make businesses productive, including automatic billing and online security. Germany's SAP (SAP) currently holds the top spot in that area.
How well Oracle -- and its stock -- perform in the future will depend on how well the company succeeds at stitching together its many moving parts. Oracle must integrate many kinds of different software so they can talk to each other. Oracle calls this massive undertaking "Fusion" and has already released multiple software applications as part of the project. Fusion has been described as an effort to cherry-pick the best features and ideas and stitch them together with a rewritten software code.
Shares of Oracle, which closed at $22.46 on June 6, are flat so far this year, putting them slightly ahead of both Standard & Poor's 500-stock index and the technology-rich Nasdaq Composite Index. The stock is about 50% below its all-time high, set in 2000.
Oracle sells for a premium to the overall stock market, but that doesn't mean the stock is overpriced. The stock trades at 17 times the $1.36 per share that analysts expect Oracle to earn in the four quarters that end next November. That compares with a price-earnings ratio of 15 for the S&P 500 (based on estimated 2008 profits) and estimated profit growth for Oracle of 14.5% a year over the next few years.
Oracle is due to report results for the fourth quarter and its full fiscal year, which ended May 31, on June 25. For the quarter, according to Thomson Financial, analysts expect the company to earn 44 cents a share on revenues of $6.85 billion. For the fiscal year, they see earnings of $1.27 per share on sales of $22.17 billion. The results should provide some indication of whether Oracle's business customers are cutting back on spending because of the weak economy. That is a risk for the stock.
Despite the flurry of purchases, Oracle's balance sheet is strong. As of its last financial report, Oracle held cash and securities worth $10.5 billion, while it carried long-term debt of $6.2 billion.
Analyst Goldmacher views Oracle as a steady, modest grower and he says he thinks the stock is a "relatively undervalued asset." Analyst Robert Becker of Argus Research is also bullish, noting in a recent report that Oracle's "strong, recurring revenue stream will help prosperity continue." His 12-month price target for the stock is $27.
-
Think Twice Before Getting a Credit Card Cash AdvanceA credit card cash advance can be a quick solution when you need emergency help with money. But you'll pay for the convenience with high interest and fees.
-
What is AI Worth to the Economy?The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages – until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
Stock Market Today: Stocks Rise as Treasury Yields DropA round of not-too-terrible economic data helped boost the bond market Thursday.
