According to a recent study by Computer Economics, 42%
of Oracle (
ORCL
) customers are dissatisfied with the quality of Oracle's support
while 58% are dissatisfied with the cost of the support. We believe
that continued dissatisfaction could mean that in spite of high
switching costs attached with changing software license providers,
some unhappy customers might migrate from Oracle's support and
services program, which could weigh on the stock given the high
sensitivity to licensing renewals.
The license renewal rate is an important factor for Oracle, and
even a modest decline in renewal rates could result in material
downside to our near
$36 Trefis price estimate for Oracle stock
, which is about 15% higher than the current market price. Our
analysis is as follows.
License Renewal Rates Important for Oracle
Oracle's software business mainly consists of database software
and middleware software, in which it mainly competes with IBM (
IBM
), and applications software, in which it competes
with SAP (
SAP
) and Microsoft (
MSFT
). Customers typically renew their software license support
contracts with Oracle, and Oracle has been able to maintain high
levels of 95% renewal rate in the past. We currently expect Oracle
to maintain high renewal rates of around 95% in to the future.
Normally, organizations hesitate to switch their IT applications
to a different software vendor due to high switching costs
involved, which is a key reason why Oracle has been able to
maintain higher renewal rates. For example, applications written in
Java and deployed on the Weblogic Application Server and configured
with the Oracle database will be almost impossible to switch to IBM
Websphere and configured on IBM DB2 database.
Potential Downside to Oracle Stock
If the Computer Economics report indicates potentialhigh
dissatisfaction among customers, this could be concerning for
Oracle as the possibility of a few customers switching could weigh
on renewal rates. As an example, if license renewal rates lower to
90%, or about 5 percentage points, this translates to around 10%
downside to our near
$36 Trefis price estimate for Oracle stock
.
You can see the complete $35.98 Trefis Price
estimate for Oracle stock here
.