Amidst some worries about earnings performance and rumors of a management shake-up, Oracle (Nasdaq:ORCL) decided to move up its earnings announcement and the company delivered a positive earnings surprise Monday night. While it continues to struggle in hardware, the software business is growing nicely and Oracle remains an apparently undervalued major tech stock.

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Closing the Year on a Good Note
Oracle's fiscal fourth quarter performance was not necessarily superb in a vacuum, but the company did well relative to its Big Tech peers and sell-side expectations. Revenue rose about 1% as reported on a year-on-year basis, and more than 20% from the prior quarter. Sales growth was fueled by double-digit growth in software (particularly in applications), while hardware sales dropped at a double-digit clip.

Oracle also did alright on the operating line. GAAP operating income rose 11% in constant currency terms, and the non-GAAP operating margin was about a half-point better than the sell-side average estimate.

Turbulence in Management?
Tech investors have seen a sudden spurt of turnovers, as a couple of large companies have seen their heads of sales leave for new jobs. Rumor has it that Oracle's head of North American sales, Keith Block, is soon to join that list.

According to the most prevalent rumor (as reported and repeated by the likes of Forbes, BusinessWeek and CNBC), Block made some rather disparaging remarks about Oracle's hardware business over instant messages (IMs) to other Oracle employees. Hewlett-Packard (NYSE:HPQ) is now trying to use these IMs in its legal case against Oracle.

Above and beyond any impact to the HP suit, this sort of communication also seems to go against Oracle culture. I don't pretend to be an Oracle expert, but I can't recall too many examples of Oracle ever acknowledging any weakness. Instead, this is a company that always talks itself up and touts its advantages over companies like SAP (NYSE:SAP) and IBM (NYSE:IBM). It's hard to imagine a high level employee stepping away from the cheering section and not paying a price.

SEE: A Primer On Investing In The Tech Industry

Getting More Aggressive in Cloud
Not surprisingly, and consistent with that previous paragraph, Oracle has started to get more aggressive in touting its cloud capabilities. Oracle has spent a lot of money to build up its cloud offerings (including deals for Taleo and RightNow), and now it's time to start taking some of the momentum away from (NYSE:CRM) and making sure that SAP doesn't build any in cloud.

Is there hype here in Oracle's talk of its cloud capability? Almost certainly (this is Oracle, after all). But while Oracle is not shy about talking about its abilities, it also has a reputation for backing up that talk. As such, I think investors can expect this push into cloud to be a significant part of the business for some time to come.

The Bottom Line
With the announcement of a $10 billion buyback, it seems that Oracle is probably not looking at any huge deals in the short term. That said, share buybacks offer a lot of discretion and this business generates considerable free cash flow, so it's not as though Oracle couldn't reverse course if the right deal came around.

When it comes to Oracle, the Street isn't buying what the sell-side is trying to sell in terms of growth expectations. Most analysts are looking at high single-digit revenue growth and improving free cash flow margins over the next five years, but that produces a fair value estimate well in excess of today's price. Even a mid-single digit revenue growth estimate and no improvement in free cash flow conversion produces a price target above $40.

While Oracle's sheer size and ongoing malaise in hardware may limit the revenue growth (and that's a major metric for many tech investors), the underlying value in Oracle shares isn't captured by today's price. Investors have to realize that the payoff could be delayed (as it was for Microsoft (Nasdaq:MSFT) and Cisco (Nasdaq:CSCO), but these shares look priced to deliver solid gains.

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

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