Oracle stumbles amid sales worries

It's still early in Oracle's fourth quarter, but Lehman Brothers is sounding some alarm bells partially based on Sun Microsystem's earnings report last week.

Lehman Brothers analyst Neil Herman downgraded the stock to "buy" from "strong buy," and cited Sun's disappointing server sales and Oracle's recent run-up. Oracle was off $1.45 to $18.30, or 7 percent, in early trading Monday.

Oracle shares have spiked 42 percent during the past two weeks based on the no-news-is-good-news theory--Oracle hasn't issued a profit warning since its last quarterly report. The software-maker did tone down its projections based on a weak economy.

Last week, Oracle jumped 11 percent from Siebel's strong quarter. Morgan Stanley raised its ratings for several software companies, including Oracle, after Siebel reported its first-quarter results.

With Oracle's rise during the last two weeks, Herman argued that its shares are too pricey based on their historic trading range, price-to-earnings ratio and current revenue projections.

Herman also argued that Oracle's quarter could be weak because of Sun Microsystems' (Nasdaq: SUNW) recent woes. Sun, an important customer which runs Oracle software on most of its servers, reported last quarter that it is selling fewer systems. Lehman's hardware analyst, George Elling, predicts it could be down as much as 23 percent year-over-year for the next quarter.

The worries appeared even though Oracle's upcoming fourth quarter is usually a seasonally strong one. Oracle's quarter could be "unusually weak given the tough U.S. macroeconomic environment and potentially weakening conditions in international markets," said Herman, who noted that many European customers are reevaluating their IT spending plans.

Oracle could suffer as IBM's (NYSE: IBM) DB2 database software gains ground. Herman said IBM's aggressive pricing may already be putting some pressure on Oracle.

Herman lowered his estimates for the company. Earnings for the fourth quarter are now expected to be 14 cents a share, a penny lower than consensus. For fiscal 2002, Herman lowered his earnings estimate to 49 cents from 55 cents, three pennies below consensus.

"We doubt that Oracle will feel relief in the May quarter or even in the August quarter," Herman predicted.