A BAR­GAIN TECH IN­VEST­MENT

Finweek English Edition - - FRONT PAGE - Nic Nor­man-Smith (@nicns), Chief In­vest­ment Of­fi­cer at Len­tus As­set Man­age­ment.

At Len­tus, we con­tinue to have a sig­nif­i­cant por­tion of our client cap­i­tal ex­posed to high-qual­ity global tech­nol­ogy com­pa­nies. Our bot­tom-up anal­y­sis has iden­ti­fied yet another op­por­tu­nity in the sec­tor, in the form of soft­ware gi­ant Or­a­cle. This has long been a com­pany on our ‘would love to own but it’s too ex­pen­sive’ list. A com­bi­na­tion of re­cent share price weak­ness, along with growth in the un­der­ly­ing value of the com­pany, now f in­ally pro­vides an at­trac­tive en­try point in our opin­ion.

Or­a­cle may not be well known to all but the most hard­ened techies, but its soft­ware pow­ers the vast ma­jor­ity of global cor­po­ra­tions and in­di­rectly af­fects much of our daily lives. It holds a dom­i­nant po­si­tion in the data­base sec­tor (the soft­ware used to store and man­age the mam­moth amounts of data that com­pa­nies use to man­age their busi­nesses) – with nearly 50% of the mar­ket and a larger share than its next four big­gest com­peti­tors com­bined! Or­a­cle has lev­er­aged this strength to add a num­ber of soft­ware ap­pli­ca­tions onto this un­der­ly­ing in­fra­struc­ture, fur­ther ty­ing clients into its prod­ucts – from which it de­rives hefty li­cens­ing fees.

The mis­sion- crit­i­cal na­ture of its prod­ucts means t hat com­pa­nies are very wary of switch­ing to some of the cheaper (or even free) ver­sions that have been avail­able for many years. This high switch­ing cost is at the core of our in­vest­ment the­sis and why we think this is such a won­der­ful com­pany. By lock­ing cus­tomers in, Or­a­cle is able to gar­ner sig­nif­i­cant pric­ing power and earn su­pe­rior re­turns on cap­i­tal over time. This is the key bar­rier to en­try that we so of­ten re­fer to in com­pa­nies that we in­vest in.

Usu­ally a busi­ness such as this trades at a sig­nif­i­cant pre­mium, mean­ing that in­vest­ment re­turns are of­ten poor de­spite the char­ac­ter­is­tics and suc­cess of the un­der­ly­ing busi­ness. How­ever, a re­cent slow­down in Or­a­cle’s stellar his­tory of rev­enue growth has scared off many of the growth/mo­men­tum in­vestors (the share price dropped by 10% in one day af­ter a re­cent re­sults pre­sen­ta­tion).

Con­cerns about the in­creas­ing num­ber of in­no­va­tive com­peti­tors has hit senti ment and the mar­ket is pre­dict­ing that Or­a­cle’s su­pe­rior prof­itabil­ity is com­ing to an end. Com­pe­ti­tion and in­no­va­tion have al­ways been a part of the tech sec­tor, but we are com­fort­able t hat Or­a­cle pos­sesses a strong enough com­pet­i­tive moat to main­tain its lev­els of prof­itabil­ity. Re­cent deals with lead­ing ‘ cloud’ com­peti­tors l ike Sales­force. com and Mi­crosoft have al­layed much of our con­cerns about where it would fit into the chang­ing land­scape.

As al­ways, the fu­ture is im­pos­si­ble to pre­dict. How­ever, the pric­ing fun­da­men­tals of Or­a­cle dis­count a very bleak fu­ture and shift the odds strongly in the favour of the in­vestor. At a mul­ti­ple of around 10 times free cash f low, the in­vestor is get­ting ac­cess to this great com­pany at a large dis­count to the broader mar­ket. Even if Or­a­cle’s growth does stag­nate go­ing for­ward, one can still earn a sat­is­fac­tory re­turn on cap­i­tal. In ad­di­tion, the com­pany has a net cash pile of over $16bn, fur­ther in­creas­ing the in­vestor’s mar­gin of safety.

Or­a­cle head­quar­ters, USA

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