Fair value estimate: 44 USD (from 46 USD)
Investeringsanalyse, Risk Summer, 18/06/2015
Oracle doesn't have to be the first innovator to maintain its dominance in enterprise software. While there have been many critics of Oracle's long-date acquisition strategy, we believe the company has shored up its defenses, successfully anticipating the threat of cloud computing and providing its customers with a path for technology and service upgrades.
Oracle's database and middleware businesses have high switching costs, and we anticipate customers will likely move to cloud versions of the similar software. Databases contain the key data for companies to manage their business through applications, dashboards, and analytics programs. These databases must exhibit high performance, security, and accessibility. Generally, companies are extremely sensitive to the cost and risk of switching out their database technology.
Cloud computing represents a real threat to Oracle's applications businesses, although we believe the company will navigate this industry shift. Additionally, we believe the switching costs for cloud software are likely to be higher than those of on-premises products. During the next couple of years, the power of Oracle's switching costs will truly be put to the test as the company attempts to sell products that slowly migrate customers from legacy to cloud solutions.
We also believe that Oracle's support of public, private, and hybrid cloud offerings will provide an important value proposition for most of its customer base versus public cloud providers. Customers with significant security and compliance concerns may be unable, at least in the short term, to move many of their processes to a public cloud. In these instances, whether the risk is actual or psychological, Oracle is likely to hold on to its customers, in our view.
While revenue declines in Oracle's legacy hardware businesses are a drag on overall growth, the company's engineered systems have been a bright spot. By integrating hardware and software, Oracle is successfully leading a small but fast-growing segment of IT spending.
Fair value estimat: 44 USD (from 46 USD)
Bulls say
- By purchasing many solutions from one vendor, customers decrease the level of integration costs, a clear difference between IBM's and Oracle's strategies for serving the customer.
- The rapid growth in sales of Exadata, Exalogic, and Exalytics demonstrates the solid value proposition of Oracle's engineered systems.
- Large enterprises are more likely to adopt hybrid cloud technologies, favoring legacy vendors such as Oracle.
Bears say
- Business model transition is the hardest thing to get right, and Oracle has ample opportunity to fail in its efforts to adapt its products to a subscription model.
- Open-source databases, such as MySQL (now owned by Oracle), Ingres, and PostgreSQL, which small companies have been keen to deploy, pose a threat to Oracle's dominance of the database market.
- Small IT companies, such as Rimini Street, provide cheaper support for Oracle's software products, putting pressure on the firm's maintenance revenue streams.
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