Stock market bulls have argued in recent years that, while spending by
indebted consumers and governments is likely to remain sickly, big
companies, which are enjoying record profitability and strong balance
sheets, are in rude health and will spend to grow further.
The 14 per cent fall in Oracle’s shares early on Wednesday after its weak
earnings report suggests that this particular stool’s one good leg is
becoming wobbly.
Oracle sells more software to big companies across industries and geographies
than anyone else. In the past quarter, new software licence revenues grew
just 2 per cent, a 10th of the rate of a year ago.
Global companies cautious
It appears that those robust global companies are feeling a bit cautious. The
pressing issue is what this means for the earnings of other big business
technology vendors. These fit into two camps: the slow-growing value plays,
and innovative growth plays (Oracle falls between the two).
Consider a representative sample of the former – IBM, Microsoft,
Hewlett-Packard, Cisco, SAP, Dell and Xerox. Analysts expect near-term sales
growth in the 3 per cent to 4 per cent range on average. Even this may be a
bit optimistic, but the reason to own these stocks is their cash generation
and low valuations more than their revenue trajectory.
For the latter group - EMC, VMware, Salesforce.com, NetApp - the outlook is
for strong double-digit growth. If the slowdown reaches cutting-edge parts
of data storage, virtualisation and cloud computing, look out.
Business technology
Oracle is not a perfect bellwether. Last week’s results from technology
services leader Accenture were solid. Business technology spending has not
simply stopped. But Oracle’s results are unsettling, not just for other
technology companies but for companies and investors who have hitched their
financial wagons to the fortunes of the world’s largest companies.
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