To take an old cliché of the stock market and twist it around a bit, when a small tech company misses the quarter the question is “what is wrong with the company?”). But when a company like IBM (NYSE: IBM (or, in this case, Oracle (Nasdaq:ORCL)) misses, the question can quickly turn to “what is wrong with the market?”

Taken in total with the results recently reported by Red Hat (NYSE:RHT) and TIBCO (Nasdaq:TIBX), I think it's fair to say that the enterprise and government IT markets are still pretty challenging, but that Oracle in particular also continues to see increasingly aggressive competition not from established rivals like IBM and SAP (NYSE:SAP), but also from newcomers (relatively speaking) like Workday (Nasdaq:WDAY) and Salesforce.com (NYSE:CRM). Even so, I think even relatively modest forecasts for Oracle continue to point to a meaningfully undervalued stock.

Swing And A Miss In Q4
Oracle ended the fiscal year on a sour note, with another miss (the second in a row).
Revenue was flat relative to last year, although up 2% in constant currency and up significantly (22%) on a sequential basis. New license revenue was up 1% from last year, though performance in Asia was notably weak as constant currency revenue fell 7%. Maintenance revenue increased 6%, while hardware sales declined 13% despite strong growth in the Exadata business.

While GAAP operating income rose 9% this quarter, the more commonly used non-GAAP measure rose just 1% for the quarter. Operating margin did expand another half-point, but still missed the average Street estimate by about half a point.

Dividends And Buybacks, Or “All The Other Kids Are Doing It...”
Oracle has joined the ranks of large tech companies responding to sluggish growth and disgruntled shareholders by throwing cash at them. Like Cisco (Nasdaq:CSCO) and EMC (NYSE:EMC), Oracle has decided to meaningfully increase its cash returns to shareholders – doubling the dividend and adding $12 billion to the share repurchase. As the combined total of those moves is roughly the same as what I expect Oracle to produce in free cash flow for fiscal 2014, they won't strain the company's liquidity to any meaningful extent.

It's A Tough Market Out There, But Oracle Is Tough Too
Oracle is under attack in virtually all of its markets. The company appears to be losing some database market share to NoSQL companies like 10gen and Datastax and NewSQL vendors like Clusterix, and SAP's Hana is no slouch either. At the same time, companies like Salesforce.com and Workday continue to aggressively challenge the company. Taking a step back, the entire industry seems to be operating some pretty extensive price pressure, as companies cut prices to get nervous customers to sign on the dotted line.

The thing is, none of this is exactly new. Oracle has also had to deal with competition. A new database release (12c) should improve the company's competitive position in that market, and I wouldn't bet against Oracle Fusion in the SaaS market.

One other thing to keep in mind, too – Oracle doesn't take execution issues lightly. Messing up at Oracle is more like messing up on Darth Vader's ship than messing up at the Wernham Hogg or Dunder Miffin Paper Company. Consequently, I wouldn't bet against Oracle fixing the issues that are impacting sales growth today.

The Bottom Line
I don't believe Oracle is looking at particularly impressive long-term growth rates, and I do believe the company has more to fear from SaaS than SAP. At the same time, I'm not totally sold on the company's ventures into hardware at a time when software-defined everything is becoming more popular. All told, then, I expect modest forward revenue growth and declining free cash flow margins, and that's a tricky mix for software stocks, as they so often trade on growth and momentum.
Nevertheless, I believe Oracle is fundamentally undervalued. I'm looking for about 4% long-term revenue growth and somewhat less free cash flow growth, but those growth rates are still good for a $41 price target. I don't expect Oracle's stock to turn around quickly, but I do believe patient long-term investors have an interesting opportunity here.

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