Given this timing and uncertainty of the outcome of the appeals process, we are reluctant to respond to requests we have for breakup valuation. But using just a 'back of the envelope' valuation, based on current revenue multiples for comparables to each business unit, we would assign a 15x revenue multiple to the Windows business unit and a 17x revenue multiple to the applications business.
We believe the mainframe weakness will persist into the fall and possibly the December quarter, when G7 moves into full swing. In our view, this is more than a first-quarter issue, and we think both stocks will likely remain depressed.
MSFT could feel modest selling pressure in near-term following 'shock value' of DOJ's proposal that Microsoft be broken up into two separate companies.
Applications growth will again be a key focus for investors, although it contributes 25 percent of license revenue at present. We understand Oracle landed a couple of large deals in the quarter, perhaps $20 million in size, so there is some traction here.
We believe that Oracle shares, which closed Monday below $15, have limited downside and may move to near the $20 level over the next 12 to 18 months on a modestly improved earnings outlook and expanded [price-to-earnings] multiple, perhaps to the 38 to 40 range.
Our model forecasts applications license revenue growth of 55 percent and database license revenue growth of 18 percent. We expect Oracle to deliver applications growth consistent with our model and database growth in-line to slightly better than our projections.
With the stock trading at premium multiples and momentum investors exiting the stock, it may take some time ... to re-establish an upward trend.
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