Database leader Oracle Corp. (NYSE:ORCL) posted gains that severely lagged the technology benchmark NASDAQ Composite index in 2013. Over the course of last year, Oracle’s stock gained close to 16% compared to 41% for the broad composite index. This year, the stock seems to be continuing its lagging performance against the index, losing 0.3% in value so far. Continuing from its strong performance in 2013, the technology benchmark NASDAQ Composite index however gained close to 2.8%.
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Strategically, Oracle looks to be acquiring companies across various niche areas to create a holistic end-to-end IT solutions’ provider to the commercial market at large. The company acquired close to 8 companies last year, spread across its entire product portfolio. Interestingly, the acquisitions it made in its applications business are mainly cloud-based SaaS marketing solutions’ providers, including enterprise scale SaaS business-to-consumer marketing software provider Responsys (for approximately $1.5 billion in cash). Yesterday, the company announced that it signed an agreement to acquire Bluekai, a data management platform to personalize marketing programs and customer experience. 
In this note, we take a look at various trends shaping the digital marketing space in 2014 and analyze Oracle’s potential return from the acquisitions it made.
Customizable E-Commerce Experience Should Drive Digital Marketing Investments Higher
The digital marketing space is transitioning from a generic marketing campaign model to customizable campaign model specific to individual situations. Additionally, the growth in mobile and other hand-held devices globally induced a shift in customer buying process from a sales-driven approach to a marketing-driven approach. This is requiring marketers to deliver relevant and engaging content to their customers in real-time across multiple channels and throughout the customer’s life-cycle, which has led to the sharp increase in interest for various social, content, web and CRM B2C offerings in recent times. According to Gartner, digital marketing investments in 2013 have gone towards improving e-commerce experiences, followed by social media marketing and content creation and management. . These areas are currently very active.
The shift from generic marketing campaigns to user-specific, real-time campaigns typically require significant analytics power at the back-end of the marketing campaign. With the advent of cloud-based SaaS services, small and large enterprises are approaching SaaS digital marketing platform operators for their campaigns. However, Gartner reports that digital marketeers often struggle with the volume, variety and velocity of customer data that is generated. Segmenting customers and online audiences, and analyzing and deducing insights from this data, becomes a tough task. ((How to Get the Data You Need to Win at Digital Marketing, Gartner Research, August 2012)) The need for these meaningful, actionable insights from marketing campaigns is driving valuations higher for companies operating in the digital marketing industry.
Is Oracle’s Acquire-And-Grow Strategy Justified?
The Bluekai acquisition makes it the fourth acquisition for Oracle within the digital marketing space, preceded by Eloqua, Compendium and Responsys. The company spent approximately $2.3 billion on Eloqua and Responsys alone, with the deal size for Compendium and Bluekai unknown. In order to see if these acquisitions are worth the high money, lets take a look at digital marketing spending trends in 2013. Gartner reports that firms typically spend over 10% of their revenues for marketing purposes, and these budgets are expected to grow 6% annually. 
Moreover, the share of digital marketing in overall marketing budgets is expected to be close to 25% in 2013, and digital marketing budget growth outpacing overall marketing budget growth going forward.  Forrester believe the total spend on digital marketing within the U.S. is expected to reach $55 billion in 2014.  However, even the leading digital marketing players such as Constant Contact, Responsys, and ExactTarget reported revenues lower than $300 million before being acquired. This shows the extent of fragmentation within the industry, and helps understand Oracle’s thought behind its acquisition-led growth strategy.
With the latest acquisition, Oracle gains close to 300 Bluekai customers, with actionable information on more than 700 million profiles through the world’s third largest data marketplace run by Bluekai. Going forward, Oracle could begin cross-selling its digital marketing offerings to its customers. More importantly, the acquisition strategy creates a consolidation in the market place, and gives strong top line growth potential for Oracle in a booming market.
In 2014, we expect to see strengthening sales from its applications division, boosted by the acquisitions in the digital marketing space. Our $44 price estimate for Oracle’s stock is approximately 16% above the current market price of $38.Notes: