Some investors are abandoning database software giant Oracle (Nasdaq: ORCL), following what looks like a sobering fiscal-first-quarter earnings report. That’s probably a big mistake.
OK, Oracle’s $5.1 billion in revenue was a little shy of Wall Street’s projected $5.2 billion. And new license revenue declined 17 percent year over year. Mix in increasing competition from SAP, Microsoft and IBM, and a stink-eyed European Commission, which isn’t yet ready to release Sun Microsystems into Larry Ellison’s hands, and it’s tough to know exactly where Oracle’s short-term growth will come from.
And yet, even with all that, Oracle produced more than $3.6 billion in free cash flow (FCF) during the quarter, and $8.5 billion over the trailing 12 months. Oracle’s stock trades for just under 13 times FCF, below its recent cash flow growth rates. (Its trailing cash flow has grown 14 percent over the past year, for reference.)
It’s true that Oracle doesn’t appear very discounted at these levels, but buying it invests you in one of technology’s most durable businesses, led by an experienced management team that’s buying a key catalyst – Sun Microsystems’ hardware and software business – at a fair price.
Oracle stock may not be cheap, but it sure seems to be as good a long-term value as you’ll find in the tech sector.
Ask the Fool
Q. Why should I invest in stocks if all my stock picks go down with the market? If I expect another big market drop, shouldn’t I get out? – Jack, online
A. You should invest in stocks only if you understand and accept that their value will fluctuate over time, sometimes swooning or surging sharply.
Over the long haul, if you’ve bought stocks at undervalued prices, they should approach or exceed their intrinsic value. But that can take time, and patience is a key trait of most successful investors. The intrinsic value of healthy, growing companies will also rise over time.
Think twice about exiting the market in anticipation of a drop, as no one knows exactly when the market will plunge or soar. You don’t want to be sitting on the sidelines for months or years, missing out on gains.
That said, if you feel sure that any holding is very overvalued, selling is often the smart thing to do.
Q. I am a novice at investing, and I recently experienced something I don’t understand. I placed a buy order for a stock before the market opened. The stock had closed at $102 the previous day, so I bid roughly that. But it opened at $105 and kept rising. What’s the deal? How can a stock open at more than its closing price? – S.K., online
A. Demand can build up for a stock overnight, due to a positive news report or other factors. This will have buyers willing to pay more for it and sellers thus selling it for more.
At any given moment, a stock’s price reflects the last price at which someone was willing to buy it and someone was willing to sell it.
My dumbest investment
When I was a junior at the Air Force Academy, I made about $300 a month. My brother, also a cadet, was a math major. After visiting the local greyhound racing track, we figured that if we could box five dogs (out of eight in the race), eliminating three that would not finish in the top three, we could make a lot of money. We figured if we could win the first race or two that we’d be home free. I could not attend the day he went, so I gave him my monthly pay and off he went. Not only did we not win every race, I had zero dollars left over when he returned. We did manage to win 12 of 15 races, but the pots were too small to cover our bet ($240 per race to box five dogs). Nowadays I stick to good mutual funds and strong stocks and bonds, and shy away from racetracks. – W.H., online
The Fool responds: That’s smart, because the odds are in your favor when you invest in solid stocks, bonds and funds over the long haul.
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