Improvement in Oracle's Hardware Storage Share Adds Little Value to Stock


Oracle ( ORCL ) entered the storage hardware market with its acquisition of Sun Microsystems in January last year. It competes with IBM ( IBM ), EMC ( EMC ), NetApp ( NTAP ), HP ( HPQ ) and Hitachi Data Systems in the storage hardware market by selling products like flash drives, magneto-optical drives, magnetic tape drives and compact drives that are used for backing up data on servers.

Oracle's share in the storage hardware market has remained in the range of 5%-6.5% over the past few years, but we anticipate a steady increase going forward, ultimately breaching 6.5% by the end of our forecast period. Initiatives like open storage technologies should help drive this improvement.

While we anticipate Oracle's storage hardware market share will increase to just below 7% by the end of our forecast period, Trefis members expect this share to cross 8%. This optimism for Oracle's storage hardware market share is notable, but we note that the real impact on the company's stock value is negligible. This is because Oracle's core focus lies within the software market (particularly database software). The storage hardware business only constitutes about 2% of our price estimate for Oracle's stock.

We currently maintain a $38.16 price estimate for Oracle's stock , roughly 20% ahead of market price.

Storage Hardware Not a Core Focus for Oracle

Oracle has traditionally been a software player (and market leader in the database software market). We believe Oracle will continue to focus more on database, middleware and applications software licenses, where it has a strong market presence rather than focusing on storage products where it lags behind players like NetApp and EMC.

See our full analysis and $38.16 price estimate for Oracle's stock

Trefis Community Forecast

Trefis members forecast that Oracle's storage market share will increase from 6% in 2010 to beyond 8% by the end of our forecast period, compared to the baseline Trefis estimate of an increase to just below 7% during the same period. The price impact of the Trefis members' optimism is negligible, as the storage software business represents only 2% of Oracle's stock value by our estimates.

The storage business constitutes so little to Oracle's stock that any gain in market share here will not be of great impact to the company's overall equity value.

However, faster hardware helps Oracle speed up the performance of its software as well (See Oracle's Exadata & Software Give Oracle 20% Upside ). This means that Oracle's software business will receive an indirect boost each time the company launches improved hardware.

To summarize, although better storage products do not directly add much value to Oracle's stock, their impact is felt indirectly through software products. Notably, our estimates indicate that Oracle derives almost 86% of its stock value through its software products.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EMC , HPQ , IBM , NTAP , ORCL



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