From a multiples perspective, Microsoft is the cheaper of the two. It trades at a respective 10.3x and 9.3x past and forward earnings while Oracle trades at a respective 15x and 10.6x past and onward earnings. In addition, Microsoft also offers greater safety in the form of slightly lower volatility and a dividend yield that is nearly 200 bps higher at 2.8%.
At the first quarter earnings call, Microsoft's CFO, Peter Klein, noted a strong start to the year:
"We've started fiscal year 2012 with good momentum. We have great products in market, customer satisfaction is high, and we have important strategic investments and alliances to position us well for long-term growth.
This quarter, we saw revenue growth across all of our segments. Similar to prior periods, we continued to see broad-based demand across geographies, including Europe. Within our segments, the Microsoft Business Division continued its momentum with revenue of $5.6 billion, growth of 8%. Despite the best efforts of competitors, Office remains the overwhelming choice for productivity, evolving with our customers and posting impressive revenues".
While the momentum across all segments was most clearly impressive, investors have yet to fully appreciate the catalyst that cloud-based Office 365 can provide with higher tech attachment rates. Furthermore, the partnership with Nokia to market a Windows Phone0based smartphones is reportedly gaining ground. According to Credit Suisse, the mobile offering could expand gross margins substantially and soon rank third in the market.
Consensus estimates for Microsoft's EPS forecast that it will grow by 1.1% to $2.72 in 2012 and then by 11% and 10.9% in the following two years. Of the last 11 revisions to estimates, 10 have gone down for a net change of -0.4%. Assuming a multiple of 13x and a conservative 2013 EPS OF $2.95, the rough intrinsic value of the stock is $38.35, implying 35.8% upside. Modeling a CAGR of 7.69% over the next three years and discounting backwards at a WACC of 9% implies an even higher fair value of $42.99.
Oracle has relatively the same amount of upside. Disappointing announcements have been overblown and analysts now rate shares near a "strong buy". This, however, is within the context of 39 of the latest 42 revisions to EPS being made downwards for a net change of -2.7%. While there is tremendous potential in the company's strengthening demand for Exadata and Exalogic, improved switching costs have immediately improved the ability to generate free cash flow.
Consensus estimates for Oracle's EPS are that it will grow by 5.9% to $2.35 in 2012 and then by 8.9% and 10.5% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $2.44, the rough intrinsic value of the stock is $36.60, implying 33.9% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. ( source http://seekingalpha.com ) For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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