In the recently announced earnings, Oracle (
) 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 (
), HP (
) in the hardware business, IBM and Microsoft (
) in database and middleware software business and 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
$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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