Oracle ( ORCL ) and SAP ( SAP ) have traditionally concentrated their efforts on developing on-premise software, and are not considered big Software-as-a-Service (SaaS) players. SaaS works according to the concept that enterprises should be able to license only the amount of software required, versus the traditional way of procuring a license per device. According to market research firm IDC, the SaaS market could increase from $13 billion in 2009 to around $40 billion by 2014, a rapid annual growth rate of 25%.
Although Oracle is not a large player in this space, it does not mean that Oracle does not benefit from the surging expansion of the SaaS market. No doubt cloud computing players like Amazon ( AMZN ), Salesforce.com ( CRM ), Google ( GOOG ) and Microsoft (MSFT) are the direct beneficiaries of this growth, as they have the largest presence in this market. Oracle's benefit, however, is more indirect.
We maintain a $38.16 price estimate for Oracle stock , implying a 20% premium to market price.
How Oracle Benefits from SaaS Growth?
Applications act as a front end interface for a user, while the database is where the data is actually stored. Middleware is the link that connects applications to the database. Hence, applications, middleware and database software all go hand-in-hand.
SaaS software applications such as customer relationship management ( CRM ) and enterprise resource planning (ERP) are deployed alongside database and middleware software. These applications require both servers, on which they are hosted, and storage hardware, for backing up of the data.
This is where Oracle's Exadata line of servers enters the picture. The Exadata servers are faster machines that provide an infrastructure for SaaS players to host their applications. We've previously examined the outlook for Exadata in a prior note titled " Oracle's Exadata & Software Give Oracle 20% Upside ".
In short, Oracle becomes the indirect beneficiary of SaaS applications market growth since these applications require database and middleware software to be deployed on servers. Notably, Oracle is already the dominant player in the database software market with a share of around 50%.
Through Exadata, Oracle has also started to become a meaningful player in the hardware market following its acquisition of Sun Microsystems in early 2010.