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Why Oracle Investors Are Out of Luck

When Oracle (ORCL) posted poor earnings in March, it blamed poor execution by its sales staff.

But when it missed earnings again last week, it didn’t have much of an excuse. Shares plunged 10% late last week to give ORCL a return of about -17% since mid-March vs. a small gain for the major indices.

To be fair, Oracle is still peddling excuses … it’s just that nobody is buying them. You can only cite a the global economic outlook thanks to European recession and a slowdown in China and blah blah blah for so long. Eventually, you have to put up the numbers.

The bottom line is Oracle hasn’t done that, and investors are out of luck.

After the second straight disappointing quarter, characterized by flat revenue and soft demand for business software amid growing competition, Wall Street thinks the story is one of waning momentum rather than just short-term challenges.

That’s probably correct.

Consider that the $37.2 billion in revenue it just posted in fiscal 2013 is a meager 4.5% growth over 2011 numbers. Not a lot to show for two years’ worth of work. And looking forward two years, fiscal 2015 revenue targets are for only $41.1 billion. I say “only” because despite the huge number, it is a meager 15% increase above FY2011 numbers and about 10% above fiscal FY2013.

Oracle has indeed managed to grow profits through efficiencies, and the bottom line has moved higher at a much quicker pace. But that clearly is unsustainable — especially as competitors get into the market and begin chipping away at Oracle’s business.

I’m not talking about IBM (IBM) and SAP (SAP), either, but also hungry smaller companies like Workday (WDAY).

There is no doubt that the macro picture is weighing on ORCL as the company struggles in an environment where businesses are less than eager to shell out big bucks on new technologies.

It’s true that Oracle is in a great position with its $33 billion in cash, which has helped finance acquisitions like the $2 billion Acme Packet buyout as well as the most recent doubling of its dividend. But we’ve seen this narrative in big technology stocks before — be they Microsoft (MSFT) or Cisco (CSCO) — where top-line growth stagnates, profits are propped up by efficiencies and stock buybacks, and dividends are dangled before shareholders to keep them happy.

I could be proven wrong and Oracle could snap back in a hurry. Its forward P/E is in single digits and the company still is dominant.

But given the history of big tech players that wander in the wilderness, count me out when it comes to investing in Oracle stock.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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