While some stocks simply take off and never really give investors another chance until the growth story is over, Oracle (Nasdaq:ORCL) keeps giving investors second chances to buy in to the story. True, there is a risk that cloud cannibalizes the old business, and there is also a risk that it resets down to a Microsoft-esque (Nasdaq:MSFT) level of growth that compresses the multiples. But given the scope of the company's opportunities in Big Data and enterprise software in general, I would say that Oracle is worth the risk at these levels. For more, see Earning Forecasts: A Primer.

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Fiscal Third Quarter Results - Hardware Still Struggling
Broadly speaking, Oracle did as expected in its fiscal third quarter. Revenue rose a little more than 3% as reported (or about 4% in constant currency). Growth was led by the software business (up about 7%), as strength in database licenses (up 9%) offset some relative weakness in applications (up 3%). On the flip side, hardware continues to be a basket-case (down 16%) and the company is seeing ongoing share losses to the likes of IBM (NYSE:IBM). Maintenance revenue was up a solid 7% and makes up more than half of the total.

Profitability was once again a little better than expected. Operating income rose 11% on a generally accepted accounting principles basis, and operating margin was generally better than expected due to stronger gross margins.

Building out the Cloud
Oracle has been busy of late, working to build out its cloud offerings to keep pace with old rivals like SAP (NYSE:SAP) and IBM and counter younger competitors like Salesforce.com (NYSE:CRM). With the acquisitions of Phase Forward, RightNow and Taleo, Oracle has clearly put billions into this effort, but there's arguably still work to be in done in areas like cloud database. To know more about acquisitions, read Analyzing An Acquisition Announcement.

Big Data Plenty Big
There are plenty of ways to define "Big Data," but the addressable market could easily be in excess of $100 billion for a company like Oracle. Now, some of that is going to be outside of the company's grasp; the company's storage efforts don't really stack up to those of EMC (NYSE:EMC) or NetApp (Nasdaq:NTAP). But when it comes to the software side of things, there are not many companies that match Oracle's breadth in areas like data gathering, organization, analysis and decision-making.

Certainly there's ample competition. SAP and IBM are fairly strong in analytics and applications, and Oracle could arguably be better in apps and SQL products. To that end, count on Oracle to continue to be active in mergers and acquisitions - whether its smaller private companies like VoltDB or perhaps even a giant like SAS (assuming any company could ever persuade James Goodnight and major shareholders to sell).

The Bottom Line
If Oracle can continue to grow at a mid-to-high single-digit clip, the shares are substantially undervalued. Certainly it would seem that the addressable market is there, provided that there isn't more cannibalization or competition than expected.

There is definitely a risk, though, that high single-digit revenue growth leads tech investors away from these shares and towards smaller, faster-growing rivals. It's all too common to see quality cash-generating software businesses languish in terms of stock market performance. That said, value is value and it's difficult to ignore the underpriced cash flow streams at Oracle these days.

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

Tickers in this Article: ORCL, IBM, SAP, CRM

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