The Week Ahead: All eyes on Oracle

Wall Street's new rally has been largely driven by the record flow of cash into tech, biotech and small-cap equity funds
Written by Larry Barrett, Contributor on

Wall Street will turn its attention to Oracle's third-quarter earnings this week. With the FMOC meeting still a couple weeks away, investors will likely continue pouring money into the technology sector.

Last week the Nasdaq composite shot up 134 points to close at a record high of 5,048.63. With the exception of profit taking in the biotech sector, virtually every other segment of the Nasdaq caught fire. So-called "old economy" stocks withered in proportion to the gains made by the techs. "The interesting thing about the trend in the Nasdaq is this very powerful momentum pattern that started to form last year," said Gail Dudack, chief investment strategist at Warburg Dillon Read. "Until certain things happen, this momentum is going to remain strong. It's blown out targets."

Analysts noted that Wall Street's new rally has been largely driven by the record flow of cash into tech, biotech and small-cap equity funds. That, coupled with a jump in margin trading, has helped fuel Nasdaq's rise. "Not only are people putting more than their savings into the market, they're shifting their old savings in value funds to a tech fund at a time when the Fed is raising rates,'' Dudack said, referring to the Federal Reserve's campaign against inflation.

Looking ahead to this week, Oracle will report its third-quarter earnings. After leveling out at around a post-split price of $30 (£18) a share in early November, Oracle shares have surged above $80 (£49) a share this week. The stock split 2-for-1 in January.

No less than 33 of the 35 analysts covering the stock rate it either a "buy" or "strong buy", putting it in the rarified air enjoyed by the likes of Cisco Systems, Yahoo! and Microsoft.

Oracle easily topped analysts' estimates in its second quarter, pocketing $384m (£238m), or 26 cents (16p) a share, on sales of $2.3bn (£1.4bn). Most analysts expect Oracle to hurdle the current consensus estimate of 13 cents (8p) a share this time around. "There's a discernable pick up in corporate spending for database and application software right now," said Steve Palfrey, an analyst at Sanford C Bernstein & Company. "We're expecting Oracle to post strong results for the next two or three quarters."

Last quarter, software licensing sales improved 18 percent from the quarter a year ago, with database software sales jumping 17 percent to $651m (£403m). Application software sales grew 31 percent to $168m (£104m) and services revenue increased 10 percent to $1.4bn (£86m). Look for those percentages to improve even more in the third quarter.

"Pipelines are up beyond what we are expecting to grow, and we think that we have plenty of coverage on our forecast and our budget," said Ray Lane, Oracle's president, back in December. "We see it internationally, which is a big difference as well. We're now seeing pipelines grow worldwide."

With those mature businesses regaining their pre-Y2K form, investors have every reason to be confident. The icing on the cake, which could eventually become the cake itself, is the B2B market.

"Oracle's strongly positioned in the B2B market for future growth," Palfrey said. "What's driving the stock now is anticipation about the current quarter as well as the view that it could be one of the major technology providers for the B2B community."

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