Oracle Shovels Coal On The IT Sector

By Stephen D. Simpson, CFA | December 23, 2011 AAA

Oracle (Nasdaq:ORCL) certainly is no longer among the spectacular growth stories of tech, but it has at least two things going for it: a huge breadth of business and a startling record of consistency. It also happens to be a technology bellweather, and its off-kilter reporting schedule is often looked at by investors as a thermometer for the tech sector as a whole. Consequently, Oracle's rare and broad disappointment on Tuesday evening is sending chills through the tech sector and giving investors one last good nightmare before Christmas.

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A Rare Stumble
This was the first miss on quarterly earnings from Oracle in a decade; a rather remarkable record given the ups and downs of IT spending and the sheer scale of all the moving parts at the company in that time.

Worse still, it wasn't a "just one thing" type of quarter. Revenue grew only 2% and was well short of management's own guidance of 4-8%, while earnings also missed the mark. The underperformance was unfortunately even, as both software and hardware were weak. It also didn't help matters that management was cautious about the next quarter as well and forecast even more currency volatility than we've already been seeing. (For related reading, see Market Crashes: The Dotcom Crash.)

The Rush to Hit the Eject Button
With many managers, analysts and traders looking to punch out for the Christmas holiday, it's not too surprising to see a rush of sell orders across the tech sector. The week after Christmas is notable for thin volume and erratic stock movements, and nobody wants to wreck their performance (or their bonus) or perhaps even court a margin call by being over-exposed to a suddenly weak sector. So, out with Microsoft (Nasdaq:MSFT), IBM (NYSE:IBM) and SAP (NYSE:SAP) just to name a very few.

The Shot Across the Bow?
Of course, there is more than just holiday positioning at work here. This underwhelming quarter from Oracle may well be the sign that the tech bears were waiting for - confirmation that companies have started cutting back on IT ahead of what may be a weak economy for 2012.

If companies have truly decided to apply the brakes to their software rollout plans, that's bad news indeed for VMware (NYSE:VMW), (NYSE:CRM) and Tibco (Nasdaq:TIBX) - just three of the highly-valued software companies that have been feasting on a seemingly endless budget for virtualization and software as a service (SaaS) conversions.

Making matters worse, plenty of hardware sub-sectors have had their ups and downs this year, and another sign of trouble is hardly welcome. Companies like F5 (Nasdaq:FFIV) and Riverbed (Nasdaq:RVBD) have been exceptionally volatile all year long, as have storage companies like EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP). If hardware spending is about to slow, these multiples could pull in quickly.

The Bottom Line
The best case scenario here is that Oracle is suffering from Oracle-specific problems and that rivals like IBM, SAP and the like have finally gotten into their kitchen in a meaningful way. How likely is that? Well, let's just say that the market is making its feelings clear on that possibility.

The closest thing to good news here is that the worst of the damage seems to be in those stocks that had the most aggressive valuations; value-oriented investors are doing okay and growth investors know that this is part of the territory. While this may give some investors a chance for some last-minute shopping in tech, it might be wise to buy in slowly before we know just how bad things are today in tech. (Learn the technique that Buffett, Lynch and other pros used to make their fortunes. For more, see The Value Investor's Handbook.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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