Oracle's Exadata & Software Give Oracle 20% Upside

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In the recently announced earnings, Oracle ( ORCL ) management cited that it continues to grow its hardware and software business faster in terms of market share and profitability. Oracle mainly competes with IBM ( IBM ), HP ( HPQ ) in the hardware business, IBM and Microsoft ( MSFT ) in database and middleware software business and SAP ( SAP ) in the applications software business.

Oracle claims that it is not only getting ahead in the server hardware market with faster Exadata line of hardware, but also in the software market since the high-end servers makes Oracle's software access faster. We estimate that Oracle's software business is much more valuable than its hardware business.

As per our estimates, Oracle's software business constitutes around 86% (database, middleware and application software) while its hardware business (servers and storage) constitutes only around 8% of $38.16 Trefis price estimate for Oracle stock , which is about 21% higher than the current market price.

Oracle software business could get a boost

Oracle, which acquired Sun Microsystems in early 2010, leveraged its hardware technology to come up with the Exadata line of high end servers. These servers are high speed servers, having the capability of producing 30 million transactions per minute. In comparison, HP's best performance comes at 4 million transactions per minute as claimed by Oracle. This capability does make Oracle a strong contender in the hardware market and could help increase its hardware market share and margins beyond our expectations (See Can Oracle Double Sun's Hardware Revenues? ).

However, as discussed above, Oracle's main value comes from its software business. Database software mainly consists of two segments: online transaction processing (OLTP) and data warehousing (DW). Both OLTP and DW segments of database software serve different purpose and benefit from faster servers. DW databases are useful for uploading bulk data. For example, end of day operations in a bank will use a data warehouse database.  Online transaction processing (OLTP) databases are used for recording transactions in real time. For example, normal ATM transactions during the day will be stored in OLTP database real time. Oracle cited that the company is looking for increased focus in the high end DW and OLTP business for higher market share and margins.

We believe that if Oracle could leverage its high end servers to grow its software business, it could create upside to our estimate for Oracle stock. Oracle has managed to maintain its market share at around 50% in the past, and we expect it to increase slowly in the coming years.

However, if the market share grows at a faster rate to reach 60% by the end of Trefis forecast period, there could be an upside of close to 5% to our estimate for Oracle stock.

You can see the complete $38.16 Trefis Price estimate for Oracle stock here .

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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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