Divining Oracle

OK, that's a total fabrication. But it's safe to say the software company, run by Chief Acquirer Larry Ellison, isn't done buying companies. In the past several years, it's spent an estimated $19 billion to snap up some of the industry's biggest and smallest, including JD Edwards, PeopleSoft, Siebel and Retek. What Oracle wants is to become a one-stop shop for every flavor of software, from databases and industry-specific applications to security and system management tools. The hope is to beat SAP at it.

Thing is, Oracle as purchase king is exactly what's made investors nervous. The company's stock chart in the past couple of years looks like a troubling EKG reading. The shares swung wildly in 2005 to finish 11% lower. This year, things are shaping up somewhat differently: Oracle's stock has surged 11%, making the Nasdaq's 4% gain seem pokey by comparison.

Does that mean investors have embraced the strategy? That they're A-OK with Big Larry's voracious acquisition appetite and will pile into the stock following its fiscal third-quarter report Monday after the close? I sure hope so. This is, after all, a stock I was optimistic about a year ago back when it was at $12 and change. But Oracle's strategy hasn't been an easy one for shareholders to swallow.

Here's why: Buying billions of dollars worth of competitors to flesh out your product portfolio, which primarily consists of database software, is all well and good. But surviving the shock of another M&A announcement is easy compared to knitting all those disparate technologies into a strong, reliable software blanket. And that's what Oracle is trying to do. By 2008 the software giant should roll out Fusion, essentially a big, er, fusion of all the bits and pieces of software it has under its roof. That's the big catalyst for a lot of investors — and it's a long way off.

Integrating acquisitions always come with risks, and while Oracle hasn't suffered any severe digestion, Fusion is the culmination of its efforts. "It's a big risk, Fusion," says Bert Hochfeld, analyst at Hochfeld Independent Research Group. "Does it come out on time? Does it scale properly? Is it buggy? Can [Oracle] get people to migrate to it?"

Odds are, the market will receive Fusion well, says Hochfeld. Right now, SAP is the big game in town, offering loads of enterprise software packed into one box. "I think users will want to see two real choices," he says.

In the near term, investors will look for signs in Monday's report that integration is progressing well and Fusion is on track. Analysts actually expect to hear some good things with regards to North American database sales. Database, the core of the company's operation, should have a strong showing. Applications — the software products that Oracle went after PeopleSoft for — are another matter. This is a lumpy business and expectations are low. That said, a number of market watchers including David Hilal, an analyst at Friedman Billings Ramsey & Co., think that aspect of Oracle's business is stabilizing.

The good news: A solid report and the typically strong May quarter just ahead could improve investor sentiment and drive the stock higher, wrote Israel Hernandez, analyst at Lehman Brothers, in a report Thursday. Even better, Oracle shares are cheap. They trade at a price/earnings multiple of 17 — a bit higher than the Standard & Poor's 500's 16, but a huge discount to SAP's overstuffed multiple of 30. "It's painfully cheap," says Hochfeld of Oracle's stock. "The financial dynamics are brilliant, but they have been brilliant."

And that's the problem: Investors can't get past the uncertainty of Oracle's multi-year acquisition spree. If you ask me, it seems a lot of uncertainty already is baked into the stock. Sure, there's a chance this cookie will continue to trade in the same maddening range it has for a year. But shifting momentum could also yield a sweet surprise.