|BUSINESSWEEK ONLINE : MAY 8, 2000 ISSUE|
Oracle vs. Microsoft: They Could Both Be Right
Investors take note: Even with their divergent approaches, each should play a key role in computing's future
True, Oracle's stock price has been rising, and Microsoft's has been falling. And they have diametrically different visions of the future of computers. But they both still look like good buys.
Don't believe it? O.K. Get a pencil and a sheet of paper, and let's plot out the last six months' stock prices of Oracle and Microsoft. You'll get something that looks like the left side of an X. The downward slanting line represents the stock-price decline of Microsoft (MSFT), the rising line would be the valuation for Oracle (ORCL), and they cross at around 75.
You might think this phenomenon reflects nothing more than the beating Microsoft has taken from the trustbusters at the Justice Dept. The argument goes something like this: Microsoft has been declared a "predatory monopoly" by the feds, and a judge has largely agreed. And any crack in its monopolistic fortress, such as the contemplated spin-off of Microsoft Office products, means an opportunity for rival software makers such as Oracle. So, of course, Oracle's stock would start to rise.
TWO VISIONS. Granted, this may explain a big part of Microsoft's drop from 119 15/16 at its 52-week high in December to 69 13/16 at the market's close on Apr. 27. Microsoft is under siege, and two long years of court battles seem to have dampened its revenue-generating prospects in investors' eyes. At the same time, Oracle has taken advantage of Microsoft's missteps with the introduction of Windows 2000 to gain ground in the race to dominate the Net. But these are events that affect only the short-term fortunes of the two software titans. And the theory doesn't completely explain why Oracle has climbed to its current level of 77 5/16, with only a slight bounce off its March high of 90.
Here's another way to think about it: The two stocks represent a bet for investors on which way computing is going to develop. Microsoft and Oracle are building their future businesses on opposite views of the future, according to Kevin Buttigieg, a vice-president and analyst at PaineWebber. "Microsoft's vision is of a world with distributed computing, with a lot of smaller servers based on the Web," says Buttigieg. In that world, Microsoft figures that it has the right operating system and Intel the microprocessors. Oracle, on the other hand, sees the future as one giant centralized server that would be accessed by a browser.
These two visions require the development of different kinds of computer hardware -- PCs vs. whatever newfangled box some clever engineer comes up with to access a central server over the Web. If you take Microsoft's view, it means you think PCs with lots of memory to hold software and lots of chip power to churn through it all are the wave of the future. If you side with Oracle, it means the hardware won't need all that memory. All it will require is a browser that taps into a huge depository of software and information on a centralized server.
REASONS FOR BOTH. The betting sure would be easier if it were clear which way computing is going to go. But right now, it seems to be going both ways, according to Buttigieg. "The front end of applications lend themselves to the Microsoft model, but they are backing up to a larger server that fits the Oracle model," he says. So companies will want big-brained PCs for tasks like word processing or spreadsheet crunching. And they also want new, small-brained boxes that would suck vast amounts of information from the database of a central server.
There is good reason for having both. Using a giant, remote server for word processing is too slow. It makes sense to have it on individual PCs. But a company that wants to update database program in a strictly PC environment has to go into each desktop machine and change the software. That's where just making one change at the central server that can be accessed by the entire network of PCs comes in handy.
The betting on the two models isn't made any easier when you consider that the two companies are coming at the computing revolution from different ends of the process. "If you think about [software] in layers, you start at the bottom with the operating system, then there are databases, then business applications, and then e-commerce applications," says Joe Farley, a vice-president and analyst at Donaldson, Lufkin & Jenrette (DLJ). "Oracle operates from the database up. From the database down is Microsoft's territory. It's databases that will be their future battleground."
DUELING TARGETS. That could be a tough fight for Microsoft, given Oracle's near-monopoly in database software. "Oracle is the de facto standard for database technology," says Farley. "They like to claim they have 93% of the dot-com market."
Microsoft's SQLServer is a well-respected database product that could still muscle its way into the market. In the meantime, it's the Windows 2000 operating system that has pegged the analysts' consensus value of Microsoft at $125 a share over the next 12 months. Farley, who targets the stock over the next year or two at $140, believes revenues for the fiscal year ending in June, 2001, will hit $26.5 billion, with earnings per share of $1.88. Mary Meeker, the Morgan Stanley Dean Witter tech guru, anticipates the same 2001 revenues with an EPS of $1.86, up from fiscal 2000's $23 billion with an EPS of 1.66.
In Oracle's case, the growth is expected to come from its efforts in developing Internet applications software. Oracle is working on a host of new products that put it in competition with companies like Siebel, SAP, and I2. These include e-business applications in customer-relationship management that allow a business to conduct transactions on the Web, enterprise resources planning software that helps companies integrate disparate systems, and supply-chain software that manages products from when they come into a company to when they leave.
SHIFTING FOCUS. These are all growth markets that could support Oracle's revenues over the next few years. "They're trying so many different things, if Oracle is only successful with three of them, it will do great, because the market is so big," says DLJ's Farley.
Meanwhile, Oracle has been shifting focus in its services business to quit competing with systems-integration specialists like PricewaterhouseCoopers and Andersen Consulting. That likely will put downward pressure on its revenue growth over the next couple of years, even though PaineWebber's Buttigieg anticipates software license revenues will grow at an annual 20% clip through fiscal 2001.
Because of the decline in service revenues, he pegs Oracle's overall revenue growth for those years at 15% and 17%, not far from where DLJ's Farley expects Microsoft's growth to come in. Buttigieg expects Oracle earnings per share to hit 63 cents in fiscal 2000 and 80 cents in 2001. Farley has the same EPS estimate for 2001, based on earnings of $12 billion, which is around where Morgan Stanley analyst Charles E. Phillips expects them to come in. The consensus opinion on Oracle's stock: $110 within a year.
Investors in the future of the Web should think about owning Oracle and Microsoft because they're two of the four companies developing the platforms on which the Net will run -- the others being Sun Microsystems and IBM. When you plot future growth with your pencil and paper, the pattern you get will most likely look like a "Y" -- the two of them rising -- instead of half an X. "They both belong in the 'gotta own' group," says DLJ's Farley. At current prices, they probably both belong in the gotta-own-now group.
By Margaret Popper in New York
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