Enterprise software maker Oracle (ORCL) is down over 8% in afterhours following an earnings report that didn’t quite meet expectations. Shares are looking to retest 52-week lows, see chart below:

In early February, I voiced my opinion that slower growing, low multiple tech stocks are the area to be looking for bargains in the coming months. I mentioned four names, but happened to overlook Oracle. That is a mistake I’m not going to repeat.

Early reactions to Oracle’s recent earnings show that some seem to be fixating on new licenses, which came in on the low end of the 15-25% growth range. I think this worrying is closely related to the idea that Oracle’s acquisition-fueled growth is unsustainable and is really masking weak organic growth - in other words, Oracle gets its own mini-conglomerate discount. As much as this business model might be responsible for the low multiple the stock is getting now, I think it is really one of Oracle’s great strengths.

As I said, the initial reaction was that new software license growth was only 16%. While that does serve as a leading indicator and slowing growth there shouldn’t just be dismissed, 16% top line growth in a poor economic environment is nothing to sneeze at… especially when the ultra-high margin servicing segment is still humming along. Oracle has margins upwards of 80% from its multi-year (i.e. recurring) servicing contracts, and as a whole the revenues there far exceed that from new bookings. The low-end new license number - which management suggested was due to an end of quarter blip that resulting in some deferred sales - is just one data point, and not a very bad one at that. Despite this, Oracle is slated to have about $10 billion in market cap vaporized tomorrow morning. Does this spell opportunity?

I’m going to say yes, but hedge it a bit by saying that I still think there is time to select a few lower multiple tech stocks - I happen to like Oracle because they have great economies of scale to leverage and raise margins, and the growth potential seems real - but there are a few similar companies that fit the bill as well. Still, Oracle didn’t get sold off without reason. Right now there is a lack of enthusiasm for tech companies, particularly if they are dependent on corporate spending, which suddenly seems fragile. To get investors back behind these tech giants is going to require a turn in the economy and concurrent improved outlook on capital spending, which is why I still believe there is time to sit back and choose between, say, Oracle and Microsoft (MSFT) if they drop their ridiculously pricey bid for Yahoo (YHOO), or Accenture (ACN) as a pure-play on consulting and outsourcing.
Valuations among stocks like those have come down precipitously as the money in tech was channelled to faster growers… which we’re now seeing aren’t going to keep growing so fast indefinitely. But with the reasonable growth potential in place (did I mention Oracle’s earnings were up over 20%, and this was a “bad” quarter?) I’m hard pressed to not like the reasonable prices for some of the great established companies in the large-cap tech sector.

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