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ANALYST WATCH: High hopes for Oracle

Investors anxiously await Oracle's third-quarter earnings report next week, hoping the database software giant has even more good news regarding its aggressive push into the booming business-to-business e-commerce market.

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As blue-chip technology stocks go, one would be hard-pressed to find a better performing stock in the past fourth months.

After leveling out at around a post-split price of $30 a share in early November, Oracle (Nasdaq: ORCL) shares have surged above $80 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 (Nasdaq: CSCO), Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT).

Oracle easily topped analysts' estimates in its second quarter, pocketing $384 million, or 26 cents a share, on sales of $2.3 billion.

Most analysts expect Oracle to hurdle the current consensus estimate of 13 cents 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 & Co. "We're expecting Oracle to post strong results for the next two or three quarters."

While Oracle has hardly given investors any reason to worry, some analysts are concerned by its ever-expanding valuation.

In late December, ahead of the split and the stock's impressive run-up, Art Russell at Edward Jones downgraded Oracle from a "strong buy" to a "buy" recommendation.

In his research note, Russell said the stock had surged 258 percent year to date and was trading at 71 times his fiscal 2001 earnings estimate of $1.46 a share.

"We continue to feel Oracle is well positioned to capitalize on what we feel will be a post-Y2K spending boom in enterprise software, but at current prices the stock is getting much closer to being fully valued," he said at the time. "After being under-appreciated relative to their role in this new age for the past couple of years, investors have jumped head first on to the Oracle bandwagon. New money should dollar cost average."

Price-to-earnings ratios have largely been dismissed in the past few years in the technology sector. But for a handful of leaders it's still a valid measuring stick, especially for long-term investors.

With a P/E of around 176, Oracle finds itself in the same company as Cisco at 181 but considerably more pricey than Microsoft and Sun Microsystems (Nasdaq: SUNW) which sit at 60 and 125, respectively.

Money managers love all four of those stocks. But if it came down to choosing between Cisco or Oracle at relatively the same valuation, Oracle would finish a distant second.

There's no question that Oracle is booming right now, riding the wave of corporate upgrades now that the Y2K hype has evaporated.

It also plans to cut costs throughout the rest of the fiscal year, eventually hitting its target of reducing operating expenses by $1 billion a year. A good portion of the expected upside surprise this quarter could come from these cuts.

Last quarter, software-licensing sales improved 18 percent from the year-ago quarter with database software sales jumping 17 percent to $651 million. Application software sales grew 31 percent to $168 million and services revenue increased 10 percent to $1.4 billion.

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."