Oracle Corporation (ORCL), Microsoft Corporation (MSFT): A Great Tech Giant Is On Sale

Oracle Corporation (NASDAQ:ORCL) is one of the leading providers of enterprise solutions, and their products include software, services, and hardware. After a recent disappointing earnings report, shares of the company plunged 12% in a matter of days, and is currently well below its 52-week high. Is this a chance to get into a great company at a bargain, or is there more pain ahead?

The majority (70%) of Oracle Corporation (NASDAQ:ORCL)’s revenues comes from software, with the rest coming from hardware (17%) and enterprise services (13%). Recently, the company has been focusing its efforts on developing software-as-a-service products, and has made several strategic acquisitions to support this. In just the past year, Oracle has acquired cloud-computing companies RightNow and Taleo for a total of $3.4 billion, and has purchased Eloqua for $900 million.

The hardware segment has been a major reason behind Oracle Corporation (NASDAQ:ORCL)’s declining revenues and margins; however, over the next few years, the software segment is expected to grow sufficiently to increase revenues and margins over the next few years.

Valuation

After the recent drop, Oracle Corporation (NASDAQ:ORCL) certainly looks very attractive at just 12.9 times forward earnings, a huge discount to both its historical average (about 15) and its peer group average (about 19). An additional factor is the $17 billion or so of net cash (cash minus debt) on Oracle Corporation (NASDAQ:ORCL)’s balance sheet, and after backing this cash out of the calculation, the forward P/E actually drops to 11.5.

For the current fiscal year, Oracle is expected to earn $2.69 per share, taking into account the lowered expectations, and this is expected to grow to $2.94 and $3.21 in 2014 and 2015, respectively. This corresponds to annual earnings growth of 9.3% and 9.2% over the next two years, which is incredibly cheap for a company that trades at such a cheap multiple.

Oracle competes with other enterprise solutions providers such as International Business Machines Corp (NYSE:IBM), which trades at a slightly higher valuation of 12.7 times forward earnings, with lower growth expectations. International Business Machines Corp (NYSE:IBM) also does not have quite as favorable of a balance sheet, with $11.5 billion in cash and $24 billion in debt. Although IBM markets itself as a one-stop shop for enterprise solutions, I don’t view it as much of a threat to Oracle right now. Oracle has a very loyal customer base and its new acquisitions should allow it to develop a line of products that are unmatched by its peers.

Alternatives

The most logical alternative to a company such as Oracle is another large software company, such as Microsoft Corporation (NASDAQ:MSFT), which has also been trading at a lower price lately, as the release of Windows 8 was not well-received by the market.