Oracle Lags at Enterprise Servers However Still a $38 Stock

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Oracle's ( ORCL ) acquisition of Sun Microsystems has brought in a whole range of hardware products to its existing software products, including enterprise servers. Some of the server categories include: SPARC enterprise servers, CoolThread servers, x64 servers and high-end servers. Of this, SPARC enterprise servers contribute more than 50% of servers revenue for Sun, however the growth has been declining. Oracle competes with SAP ( SAP ), Microsoft ( MSFT ), IBM ( IBM ) and HP ( HPQ ) in the enterprise servers market.

Oracle's share in enterprise servers that was at a high till 2006, due to Sun's domination in UNIX market, but is now declining because of reduced customer demand as products are reaching their end of lifespan, and decreased x64-based product sales due to the delayed introduction of AMD quad core-based products.

While we expect Oracle's enterprise server share will decline gradually to 8% by the end of Trefis forecast period, Trefis members predict the server share will increase from current level of 9.4% and then stabilize at 10.2% over the forecast period. The positive member estimates don't have a significant impact on ORCL stock because enterprise servers constitute less than 6% of Oracle's stock price according to our calculations.


We currently have a Trefis price estimate of $38.16 for Oracle's stock , about 18% above the current market price of $32.40.

x86 Server Market Grows Driven by Virtualization…

According to market research firm Gartner, the worldwide server shipments market grew 14.2% and revenue increased 15.3% year on year (YOY) in Q3 2010. Gartner credits x86-based servers as the main driver for market growth. Customers are purchasing servers with more high-end configurations for use in virtualization of server workloads. This has resulted in higher average selling price of servers, thereby pushing revenue higher than shipments.

… But Oracle's Share is Declining

The x86 market is on an uptrend as it has virtualization capabilities and provides low cost advantage to companies while UNIX servers are high-end and would struggle in a tough environment. Sun derives almost 90% of its revenues from UNIX-based servers and the rest from the x86 servers. Though Oracle-Sun has been trying to diversify and consistently increase its x86 servers portfolio, the incremental effects are much too small. All of the top five global server vendors, except Oracle, had year-on-year revenue increases for Q3 2010, according to Gartner. HP led the server market with 32% share; IBM followed close in second spot at 30.2% share, and Oracle had a share of 6.2%.

Trefis Community Forecast

Trefis members predict Oracle's enterprise servers market share will remain steady at around 10% in 2011, compared to the baseline Trefis estimate of a decrease from 9.2% in 2011 to 8% during the same period. This implies a slight increase to our price estimate.

Our complete analysis for Oracle's stock is here .




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



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

Referenced Stocks: HPQ , IBM , MSFT , ORCL , SAP

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