The world's second largest software developer, Oracle (ORCL) specializes in database management tools. The firm also offers a suite of applications software, which is designed to help large organizations effectively manage and automate their business operations. Among other uses, Oracle's application products provide valuable business intelligence in key areas ranging from accounting to human resources to supply chain planning. 

Many of the companies we typically profile in our premium value investing newsletter -- Margin-of-Safety Investing -- are small firms that are still largely undiscovered by Wall Street. Given the lack of efficiency in the small and micro-cap markets, there is a wider pool of quality, undervalued candidates in this overlooked corner of the market. However, sometimes even the most scrutinized mega-cap company can become underpriced in the face of pessimism and uncertainty. 

Such is the case at Oracle, which has been out of favor with most technology investors for the past several years. There are several often-cited reasons to explain the stock’s lagging performance of late, most notably: a tough competitive landscape, a slowdown in the company's core database market, and integration risks related to its recent acquisitions. 

While such issues do raise questions that are worth examining, long-term investors have little reason to be alarmed. For the most part, these concerns are overblown. In addition, they're more than offset by a number of positive factors. 

Oracle is one of those rare companies that possess both growth and value attributes. Over the next year, the company is expected to post solid top and bottom-line gains of +19% and +17%, respectively. Yet despite these projections, the shares are trading at just 17 times this year’s earnings -- rock-bottom for a software company. Not surprisingly, the stock is a top holding among many of the nation's largest growth-oriented mutual funds, as well as a growing number of leading value funds. 

In the recently completed third quarter, Oracle delivered strong adjusted earnings growth of +21%, with revenues rising +18% to a record $3.5 billion. Revenues generated from the sale of new software licenses (which represent one-third of total revenues) jumped +16% to $1.1 billion for the quarter. This impressive figure bodes well for the future, as new licenses typically lead to a recurring stream of high-margin product service and support sales down the road. 

Although the performance of Oracle's core database business was slightly weaker than expected, demand for its applications software was robust. Sales were particularly strong in Europe -- the backyard of rival SAP -- rising +119% for the period. Currently, Oracle is the number two player in this growing market (with a 10% market share), and going forward it should have opportunities to chip away at leader SAP in the years ahead. 

To be sure, much of Oracle's growth is attributable to the company's recent $20 billion shopping spree. Oracle completed the $11 billion acquisition of former rival PeopleSoft in January 2005, and since then the firm has also closed mergers with Siebel and several smaller software makers. 

Though Oracle has been weighed down by lingering concerns that the company will have trouble digesting these purchases, management has a successful track record with respect to past integrations. There have been no major complications thus far, and fears that customer retention might suffer appear to be unfounded, as renewal rates remain quite high. 

Ultimately, these recent acquisitions could prove to be a key growth driver for Oracle. By boosting the company's standing in the applications software space, they will power the firm's growth in the years ahead -- even as its core database market continues to mature. Going forward, CEO Larry Ellison has forecast healthy double-digit growth rates for the foreseeable future. 

Though the strongest growth days for database software may be in the past, Oracle still has an established base of roughly 230,000 customers, and this client base throws off prodigious amounts of cash. Going forward, most of these accounts should remain loyal, especially considering the hefty expenses and potential business disruption involved in switching to a new vendor.

Though merger-related concerns continue to overhang the shares, the benefits of the firm's recent acquisitions will eventually shine through. In the meantime, Oracle should continue to grow -- both organically and via additional acquisitions. And as revenues continue to pour in, much of it will be quickly converted into cash flow. Currently, the company churns out more than a quarter of free cash flow for every dollar of revenues taken in. 

With all of the above factors in mind, long-term investors might want to take advantage of this window of opportunity to pick up shares of this highly profitable, global powerhouse at a compelling price.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Half-Priced Stocks. The mission of Half-Priced Stocks is to help our readers identify securities that are trading at the steepest discount to their intrinsic net worth. In some cases this discount can reach up to 50% or more, giving savvy value investors the chance to purchase quality stocks for just pennies on the dollar. To receive your copy of our most recent issue of Half-Priced Stocks, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
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