Thursday, September 22, 2011

Among Business Software Warriors Microsoft, Oracle, and, Only Microsoft Will Boost Your Portfolio

In the battle for a share of corporate software budgets, winning depends on confidence. That is, a company will only spend its money on software if it believes your company will be around for years to come.

That's why it is so impressive that (NASDAQ: CRM) was ever able to break into the market. Facing competitors like Oracle (NASDAQ: ORCL) and Microsoft (NASDAQ: MSFT), what accomplished as an upstart is a great lesson for others. But should any of these companies be in your portfolio?

The global market for business software is huge. Ovum expects it to rise 8.2% in 2011 to end the year at $267 billion. And it will keep growing at a 7.7% annual rate to hit $358 billion in 2015. What's driving that growth is "exploding volumes of data, increased enterprise mobility, the transition to cloud computing models, and the emerging markets."

And the leaders in selling it have big names. Microsoft remained the world's top software vendor according to Ovum, retaining 20% of the market. Oracle, IBM (IBM) and SAP followed in that order. But Microsoft is not innovating enough to gain significant market share.

But what does it take to win that business? If its fiscal first quarter earnings report is any indication, Oracle is winning big. Its CEO, Larry Ellison, has spent $40 billion since 2005 on acquisitions of corporate hardware and software companies and has created bundles of products that boost corporate IT productivity.

The result is rapid sales and profit growth. Its sales for the quarter ending August 31, were up 12% to $8.37 billion meeting expectations. And net income was up 36% to $1.84 billion -- $50 million more than Wall Street expected.

The rise was due to increased corporate spending on its database programs and applications that help run businesses -- many of which combine the hardware Oracle got from its $7.4 billion acquisition of Sun Microsystems, according to Bloomberg.

Oracle wins for two reasons:
  • Safety. Corporations see it as a safe choice so buying its products will not result in the head of corporate IT getting fired because the company goes out of business.
  • New products that boost productivity. Oracle is acquiring the products that companies need to handle their information management challenges and getting them all to work together.But should you invest in any of these corporate software winners? You should consider Microsoft, but avoid Oracle and Here's why:
It is remarkable that any small companies have been able to grab business from Oracle. But former Ellison protege, Mark Benioff, and founder and CEO of did just that. Benioff is a great salesman who used the contacts he developed while selling Oracle products to see an opportunity to give business customers the best of both worlds.

It lets companies pay a monthly fee to rent customer relationship management (CRM) software from This lets companies get the benefits of innovation -- since is continuously improving the product -- while avoiding the fixed costs of buying hardware and software on which to run that software.
  • Microsoft: profitable company, cheap stock. Microsoft revenues are up 12% in the last year and it earns a whopping 33% net profit margin. Yet its Price-earnings-to-growth ratio (PEG) is a low 0.78 -- 1.0 is fair value -- on a P/E of 9.7 on earnings forecast to grow 12.5% to $3.13 in fiscal 2013
  • Oracle: profitable company, expensive stock. Oracle revenues are up 32.8% in the last year and it earns an impressive 25% net profit margin. Yet its PEG is a high 1.58 on a P/E of 17.1 on earnings forecast to grow 10.8% to $2.56 in fiscal 2013.
  • barely profitable company, very over-priced stock. revenues are up 27% in the last year but it earns a slim 1.5% net profit margin. And its PEG is a grossly over-valued 3.37 on a P/E of 633 on earnings forecast to grow 188% to 0.57 in fiscal 2013 -- after its earnings plummet 70% in fiscal 2012.
What is most interesting is that investors seem to like Oracle's faster sales growth and solid profitability more than Microsoft's slower growth but higher margins. Meanwhile, may be doing an admirable job of attracting customers but it does not seem able to make a profit in the bargain.


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