Oracle's financial results don't mean much for its rivals.
Yet investor money flooded into business-application stocks Tuesday after Oracle, the second-largest software company, reported results that weren't as bad as many observers had feared.
Oracle was up almost 13 percent Tuesday, and the rest of its sector followed: Siebel Systems rose 9.4 percent, Manugistics gained 9.5 percent, SAP picked up 6.2 percent, PeopleSoft gained 2.5 percent, BEA Systems rose 2.5 percent, and J.D. Edwards advanced 4.2 percent. Some of those stocks had greater gains earlier in the day.
The optimistic sentiment might be fueled by little more than that: sentiment. Oracle may be a technology bellwether, but it's not necessarily a proxy for the business-software market or an indicator for rivals.
"Oracle results do not provide much insight for Siebel," Goldman Sachs analyst Rick Sherlund wrote Tuesday. "We think Siebel will likely meet our estimates for the quarter, but it is probably a more difficult quarter than in the first quarter, and the environment is clearly increasingly more challenging. We continue to expect that estimates may need to come down for the software group for the second half of this year and for 2002."
From the rivals' point of view, about the best that can be said about Oracle is that it didn't claim any market share gains. But Oracle's report sounded like bad news for the business-software market as a whole.
After all, the company's overall revenue was lower than expected. And Oracle's sales of non-database software fell more than 24 percent year over year.
Oracle's latest performance may have been better than anticipated, but expectations were low to begin with. The company's target of 15 cents per share was 32 percent below what research firms were predicting before March, when executives told analysts to plan for a lower May quarter.
In fact, the company's latest report mostly echoed what other companies have been saying for the past several weeks: Things are bad, and no one knows when they're going to get better.
But with Oracle, investors focused on earnings rather than market demand. For instance, Salomon Smith Barney analyst Gretchen Teagarden upgraded Oracle largely based on "management's ability to continually extract operating expenses from the business."
But Oracle's efficiency says nothing about the market as a whole, which isn't doing so well.
"We are far from seeing the full recovery of the information technology spending environment," J.P. Morgan H&Q analyst Jim Pickrel wrote. "The combination of the slowing European region, Oracle's dismal applications growth rates, and the increased pressures in the competitive environment all indicate that Oracle is not quite out of the woods yet."
Neither is the corporate applications market. Even people generally pleased with Oracle's report remain concerned about the company's non-database business.
"Applications a dark cloud on shining results," reads the title of the latest Oracle report from Epoch Partners analyst Mark Verbeck.
Beyond market trouble
Verbeck believes Oracle's applications shortfall can be blamed on strong competitors. But WR Hambrecht analyst Rich Petersen isn't so sure; he believes the entire industry faces a problem beyond the economy.
"Our opinion is that the U.S. has over-invested in information technology over the past decade and is slowly digesting massive investments in software," Petersen wrote. "With this theme of over-investment as a backdrop, we are not inclined to look for a broad recovery in software stocks anytime soon."
Petersen characterized the phenomenon as an "information technology tsunami." In his view, corporations need a pause in technology spending to digest the software they already have.
He cited statistics for U.S. gross domestic product that show the "information processing" category now consumes almost 6 percent of all capital spending. The software portion of "information processing" has grown 80 percent in the past 10 years.
"Depending on your viewpoint, this is either a validation of the great need for software or confirming evidence that the U.S. has over-invested in software," Petersen wrote. "We think there is some evidence that the U.S. has over-invested in IT and needs to digest this investment over the second half of 2001 before spending more on software."