Oracle's Got What It Takes - Barron's

Barron's cover story this week takes a sensationally bullish stance on Oracle (ORCL) and its controversial CEO Larry Ellison.

Oracle bears seem to think Ellison is pre-occupied with yacht racing. It may be true that he loves boating, but with 42 acquisitions worth more than $30B in less than four years, it's hard to fault Ellison for giving Oracle less than his full attention. Coupled with its formidable $22B in annual revenue, margins have climbed to 42% from 36% five years ago.

Its aggressive buying spree has made Oracle number-one in non-mainframe databases and middleware -- leaving only enterprise applications in which it trails rival SAP (SAP). "Our goal is to be No. 1 in every segment in which we participate," Ellison says. "We are growing faster than [SAP], and I think we can catch them," which he plans to accomplish by buying smaller, industry-specific software developers.

"The name of the game is scale," Ellison says, explaining his aggressiveness. Software developers with annual sales of $250M-$1B average operating margins of 10%. $1B-5B average 16%. The four biggest -- Oracle, SAP, IBM (IBM) and Microsoft (MSFT) average 30%.

Oracle has a great record of maintaining customer bases, both organic and acquired. Maintenance revenues are growing at a 24%/year clip, and Oracle's maintenance-renewal rate is 90%, despite its refusal to reduce fees to snag customers.

Barron's says Oracle should easily maintain 20%+ annual earnings growth. Analysts think shares ($21) are worth $24-30. Ellison agrees: "I think we do deserve a premium multiple. The market gets it right over a long period."

Source: http://seekingalpha.com

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