Is Oracle Corporation a Good Stock to Buy?

As an application software company focused on enterprise users, we would compare Oracle to Microsoft Corporation (NASDAQ:MSFT) and International Business Machines Corp. (NYSE:IBM). Market watchers are beginning to wonder how successful Microsoft’s new version of Windows will actually be; while some number of sales will occur no matter what, forward estimates seem to imply a bump to earnings from rapid adopters. The forward P/E is 8, but we can see the company underperforming analyst targets and so we would wait for more information about the reception of Microsoft’s new products. IBM, meanwhile, is being weighted down by its hardware business but managed to report flat earnings in the third quarter compared to the same period in 2011. Its trailing P/E is 14, a slight discount to Oracle that we think about accounts for its weaker business performance.

SAP AG (NYSE:SAP) and salesforce.com, inc. (NYSE:CRM) are two additional peers for Oracle. These companies are more priced for growth: SAP carries trailing and forward P/Es in the 20s while salesforce.com trades at 78 times forward earnings estimates. SAP’s business hasn’t been particularly well, with earnings falling despite rising revenue, and we think that we would avoid the stock. We do see some growth at salesforce.com- revenue increased 35% in the most recent fiscal quarter compared to a year earlier, but we’re skeptical that it can continue a high growth rate for a long enough time to match its price. We’d also note that 15% of the outstanding shares are held short, further suggesting that it may not be a good value.

Oracle (along with IBM) seems to be a better value than SAP or salesforce.com. In addition, we’re more confident that those two companies will maintain and grow their business going forward than we are with regards to Microsoft. Oracle is slightly more expensive than IBM on a P/E basis but has seen higher growth rates recently; investors should look at these companies in more detail but could easily pick one or both for a value portfolio.