Oracle (NASDAQ:ORCL), which is primarily known for its database software business, also draws a significant portion of its value from middleware software and applications software. Oracle’s database software business constitutes about 38% of the $36 Trefis price estimate for Oracle stock, while middleware software adds another 24% and applications software also contributes 24%.
Oracle has posted market share gains in middleware software licenses since 2006, despite facing stiff competition from players like IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT). Here we examine the headwinds these competitors pose on Oracle’s ability to continue its market share run.
Our $36 price estimate for Oracle currently stands about 13% ahead of market value.
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What is Middleware?
Middleware is a portfolio of software product tools used to build and deploy software applications. It acts as an interface between front-end applications (like web-based applications) and back-end applications (like the database). Hence, middleware software sales depend heavily on database application software sales.
Oracle’s Presence in Middleware Software Market
We estimate that Oracle’s share in the middleware software market has increased from around 8% in 2006 to 16% in 2009. We project that Oracle will continue its run, but at a slower pace, approaching 20% by 2016.  
IBM has observed more modest growth in its market share, from around 28% in 2006 to 31% in 2008, while Microsoft, a much smaller player in the market, grew its share from 2.4% in 2006 to 3.6% in 2008.  
Oracle’s sharp rise in market share is attributable to its acquisition of BEA in April 2008. With this acquisition, Oracle acquired important middleware tools like the Weblogic Server (a tool for deploying Java based enterprise applications) and Tuxedo (a tool used to deploy mainframe-based applications).
Since the middleware software products are tightly integrated with database and application software products, we expect that Oracle’s increasing presence in the database and applications market could lead to a corresponding increase in its middleware software market share. We expect Oracle to continue to increase its share in the database as well as applications software market.
Although the middleware market share growth of IBM and Microsoft has come at the expense of smaller players in the past, their growth nonetheless presents a threat to Oracle’s expansion. If competition from IBM and Microsoft halts Oracle’s middleware market share gains, there could be downside risk to our price estimate for Oracle. We estimate downside of roughly 5% to our price estimate if Oracle’s middleware market share declines to around 12% by the end of Trefis forecast period, instead of the 20% that we currently forecast.
Drag the trend-line in the chart below to see the impact of various middleware software license market share trends on Oracle’s stock value.Notes: