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Food for thought.  Have a Merry Christmas, everyone.   Nancy

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Critical Months Ahead for Oracle
By Hal Plotkin
CNBC.com Silicon Valley Correspondent

Dec 21, 2000 03:39 PM

Oracle Corp. {ORCL <http://www.cnbc.com/stock/dtq.html?sym=ORCL>, News
<http://www.cnbc.com/news/news/conews.html?sym=ORCL>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=ORCL>} isn't out of the woods
First, the good news: Oracle's shares have risen about 6% since the company
reported slightly better-than-expected results for its fiscal second quarter
last Friday. Oracle executives also boosted their guidance for the company's
fiscal third quarter by a penny, to 12 cents a share bringing it in line
with the Street's estimates. Oracle's fiscal 
second-quarter earnings came in at 11 cents, beating First Call Corp.'s
consensus analyst estimate by 1 cent.
But don't pop the champagne corks yet. The big risk for Oracle investors is
expected to present itself during the company's second half. And we aren't
talking a small-potatoes issue here.
Many of the same analysts who presciently warned that Oracle's stock was
overvalued last fall now say that it could be heading for an even-steeper
slide if the company's projected sales of new Internet-based applications
come in below the lofty expectations that are still factored into the stock
52-Week Stock-Performance of Oracle Corp. 	
"Oracle did $435 million in application sales so far this year," says
Robertson Stephens analyst Eric Upin. "They're going to have to do three
times that number during the second half [to meet revenue targets]. Until we
get to the forth quarter, there is risk, and the risk should be priced into
the stock."
Upin started ringing the warning bell on Oracle's stock earlier this year
when he saw how much the company was depending on sales of applications that
were back-loaded toward the end of its current fiscal year, which ends in
May. He says it is possible that Oracle will make those numbers. But a miss,
which he says seems just as likely if not more so, could knock the wind out
of the stock's sails in a very big way. 
"They're going to need a good economic environment and a crack sales and
marketing team to pull that off,"Upin says. "The company had a nice quarter
during a seasonally strong period, but the numbers are starting to get real
big. For Oracle, the make-or-break quarter is really not this quarter but
the next two."
Upin says the timing could prove problematic for Oracle because many
businesses are expected to cut down on their capital spending during the
next quarter, which would put even more pressure on Oracle's final, year-end
To be sure, most analysts are still quite sanguine about Oracle's prospects,
with 13 analysts still rating the stock "strong buy," just one fewer than
three months ago.
Investors who followed the advice of those analysts three months ago,
however, have lost quite a bundle in the time since.
Even so, most Oracle bulls are staying the course, with many of them saying
that it is the one software company, perhaps even the one technology
company, that has demonstrated an ability to surmount the forces that have
brought so many similar stocks down in recent months.
The pro-Oracle analysts particularly like the fact that the company's second
quarter net income rose 62%, despite the fact that currency-exchange issues
accounted for a 7% hit on the company's growth. The negative impact of
currency exchange rates, which Oracle overcame, has been cited by a number
of other tech and multinational firms that have issued recent earnings
"Oracle's performance is particularly impressive in light of the currency
drag," says Jim Mendelson, an analyst at Wit SoundView, based in Stamford,
Conn. "The company has a lot of things working it its favor."
Mendelson has a "strong buy" rating on the stock, along with the $48 price
target he established at the beginning of this year. "North of $48 is not at
all unreasonable for the stock," he says.
The analyst's one caveat is the fear of a hard rather than soft landing over
the next few months. 
"I can't say I don't worry about Oracle in the context of a slowing
economy," Mendelson says. "But I think a soft landing will be OK. A hard
landing would be different because it means any company of Oracle's size
would almost be inevitably impacted. But I think it's going to take a major
macro event to hurt them."
The skeptics, however, see that macro event lurking in the company's own
balance sheet, in particular, Oracle's promise of accelerating growth
throughout the rest of the fiscal year.
Analyst Opinions: Oracle		
Strong Buy	12	
Buy	15	
Hold	5	
Sell	0	
Strong Sell	0	
Source: Zach's  Investment Research		
"Oracle's first quarter is always its weakest, and the fourth quarter is
always the strongest," says William Epifanio II, an analyst at J. P. Morgan
in New York. "But this year is a hockey stick year that is very back-loaded.
If the economy gets worse, that's not a good sign."
Epifanio has a "neutral" rating on the stock, without a current price
target. His reluctance is noteworthy, given the fact that he had picked
Oracle as his stock of the year about 12 months ago. The analyst downgraded
the stock to its current rating in July, when it traded at 44 a share, based
on valuation concerns that he says haven't yet abated.
"Given the economic slowdown, I'm not yet comfortable that the numbers
Oracle is seeing will be strong enough," to meet fiscal year-end goals,
Epifanio adds.
Robert Schwartz, an analyst at Thomas Weisel Partners in Boston, adds that
Oracle must beat out a larger number of increasingly hungry competitors in
the online-applications arena compared with its core database business where
it has far fewer direct rivals.
"You've got Broadvision Inc. {BVSN
<http://www.cnbc.com/stock/dtq.html?sym=BVSN>, News
<http://www.cnbc.com/news/news/conews.html?sym=BVSN>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=BVSN>}, Art Technology Group
Inc. {ARTG <http://www.cnbc.com/stock/dtq.html?sym=ARTG>, News
<http://www.cnbc.com/news/news/conews.html?sym=ARTG>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=ARTG>}, BEA Systems Inc. {BEAS
<http://www.cnbc.com/stock/dtq.html?sym=BEAS>, News
<http://www.cnbc.com/news/news/conews.html?sym=BEAS>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=BEAS>}, Ariba Inc. {ARBA
<http://www.cnbc.com/stock/dtq.html?sym=ARBA>, News
<http://www.cnbc.com/news/news/conews.html?sym=ARBA>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=ARBA>}, Commerce One Inc.
{CMRC <http://www.cnbc.com/stock/dtq.html?sym=CMRC>, News
<http://www.cnbc.com/news/news/conews.html?sym=CMRC>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=CMRC>} and many others,"
Schwartz says. "When you look at those companies, you often see single
application sales of $10 million or more. That's what you need to dominate a
space, and I don't see that happening at Oracle yet. It's very hard for
Oracle to get the acceleration it needs without those big wins."
Schwartz initiated coverage of Oracle's stock three weeks ago with a
"neutral" rating.
"Oracle's revenue growth has to accelerate to grow into its share price,"
Schwartz says. "Other companies, such as Siebel Systems Inc. {SEBL
<http://www.cnbc.com/stock/dtq.html?sym=SEBL>, News
<http://www.cnbc.com/news/news/conews.html?sym=SEBL>, Boards
<http://msgboards.cnbc.com/default.asp?symbol=SEBL>}, Ariba and CommerceOne,
can slow down their rates of growth and still be able to justify their
prices. Oracle is going to have to run very fast against good competitors
and grow applications licensing revenue by 70% a year for the next five
years [to justify its current valuation]. That's why we thought the stock
was overvalued at $28 [a share]."
Andrew Roskill, an analyst with UBS Warburg in New York also recommends
caution on Oracle, particularly over the short term. He has a "hold" rating
on the stock and argues against any new purchases.
"The applications business is important, but it's not what I'm focused on,"
Roskill says. "It's the rest of the company's business, the database and the
tools business, which accounts for about 80% of the company's revenue. If we
see a slowdown we're going to feel it more on the database side, and that
could leave them with much tougher year-ago comparisons."
Roskill quickly adds that he still thinks Oracle is "extremely
well-positioned long-term."
But like others, he warns that Oracle investors face the risk of some
significant additional setbacks before the company's future direction
becomes more certain.

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