Oracle Corporation (ORCL): This Software Behemoth Is Priced for a Meltdown

In any case, Oracle has been acquiring companies in the cloud space and its installed base is unlikely to be wooed away by SAP. Therefore, most of the competition will take place at the margin. Each incremental customer will be more difficult to acquire, but Oracle’s current cash flows remain safe from SAP.

Meanwhile, Oracle maintains a steady advantage over International Business Machines Corp. (NYSE:IBM) in that it provides a whole range of solutions — database software, application software, and hardware — compared to a more narrow range provided by IBM.

Oracle Corporation (NYSE:ORCL)’s acquisition of Sun Microsystems placed it in direct competition with IBM’s servers. Oracle’s newest servers are faster than IBM’s and are less expensive. However, International Business Machines Corp. (NYSE:IBM)’s servers tend to be more reliable and have a reputation for strong security — an important component in the value proposition.

IBM’s mainframes continue to sell well in the financial services industry, but the proliferation of cloud computing is lessening the demand for IBM’s expensive systems. Like Oracle, IBM faces competition from players in the cloud space like SAP and Workday. In fact, the proliferation of lower-priced cloud technology hurts the bottom line of IBM and Oracle alike; both would rather sell customers on their higher-priced integrated solutions. But IBM’s strong relationships and current integration into customers’ businesses will enable the company to retain much of its current customer base, while new customers will increasingly look to SAP and Oracle, which can provide a broader range of SAAS.

Investment case

On the surface, Oracle Corporation (NYSE:ORCL) trades at 14 times trailing earnings. However, after backing out $3 in net cash, the company trades at just 10 times free cash flow. A 10% free cash flow yield — for a company that is almost certain to grow cash flows over the next five years — is a bargain. For Oracle to trade this low, it is an opportunity too good to pass up.

The article This Software Behemoth Is Priced for a Meltdown originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Oracle. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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