Very few tech companies can do what Redwood City, Calif.-based Oracle Corp. (NYSE:ORCL) has done, having grown revenue nearly 15% a year for the past decade after establishing itself as a top-three software company with over $10 billion in revenue. And yet here Oracle is, with nearly $38 billion in trailing revenue and having outgrown Redmond, Wash.-based Microsoft Corp. (Nasdaq:MSFT), Armonk, N.Y.-based International Business Machines Corp. (NYSE:IBM) and Germany's SAP AG (NYSE:SAP) to maintain and build leadership in the evolving IT space.

The challenge for Oracle now is to prove that it can keep that growth engine running. Sales growth has slowed to a crawl the past couple of years, despite the company spending $10 billion on acquisitions. Strong positions in database, applications, middleware, and emerging opportunities in hardware and cloud computing should at least support mid-single-digit growth. That doesn't suggest huge opportunity at these levels, but Oracle would be worth another look on a pullback.

Covering the Waterfront

Oracle is perhaps still best known as a database company and that business still generates a large amount of the company's revenue. It's also still an area of strength for the company, with a market share of around 40% that is well ahead of Microsoft (around 20%), IBM (close to 20%) and SAP. This business has long generated substantial cash flows that Oracle has put to work in expanding its business.

App development and infrastructure is a good example. Oracle has built this business to a point where it holds about a quarter of the market, about a third less than IBM, but almost twice that of Microsoft. The story is similar with middleware (software that provides services to applications outside an operating system), where the company now holds a mid-teens market share. Oracle doesn't necessarily always have the best product in any given category, but there are not many enterprise software needs that Oracle cannot meet for its customers.

Changing with the Times

Oracle has done a good job of changing up its business mix to stay in sync with its enterprise customers' needs. In the so-called Big Data arena, Oracle has developed a wide array of products for data gathering, organization, analysis, and decision-making.

Oracle has also moved aggressively to position itself in the cloud/software as a service (SaaS) and keep pace with newcomers like San Francisco-based Salesforce.com Inc. (NYSE:CRM). The company's Fusion Apps platform now boasts 5 million subscribers, up from 2 million just eight months earlier. Fusion Apps now includes a wide array of functionality, including financial management, human capital management, CRM, project management, procurement and supply chain management, allowing it to compete effectively with rivals like Salesforce.com and Pleasanton, Calif.-based Workday, Inc. (NYSE:WDAY).

Build and Buy

Oracle has never had any noticeable problem with the “not invented here” syndrome that afflicts other tech companies. In fact, acquisitions have been a major part of the company's growth strategy for a long time now. Over the last ten years, Oracle has spent an average of 20% of its revenue on mergers and acquisitions while also spending about 12% to 13% of its sales on R&D.

From PeopleSoft to Siebel, Hyperion to BEA Systems, Sun to RightNow, Taleo to Acme Packet to Responsys, Oracle has long made a habit of identifying those markets where it feels it needs to have a presence and then buying strong players in those spaces.

At Oracle's size, another decade of double-digit average annual revenue growth is going to be very difficult to accomplish. On the other hand, its sizable recurrent revenue and rich annual cash flow provide it the wherewithal to buy or build whatever it needs to maintain its presence at or near the top of the heap in enterprise IT. Cloud service offerings such as Seattle-based Amazon.com, Inc.'s (Nasdaq:AMZN) Amazon Web Services are a threat, but here too Oracle has adapted with the times, making many of its products available through Microsoft's cloud service platform.

The Bottom Line

Investors should look for 4-6% revenue growth from Oracle, with similar growth in cash flow. That supports a fair value close to today's price, making Oracle a less interesting investment option next to alternatives like Microsoft. That's probably not going to make anyone rush to sell Oracle, but it also means that would-be investors will need to see a pullback to the mid-$30s before getting excited about buying the shares.

Disclosure: As of this writing, the author had no positions in any of the stocks mentioned.

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