Shares of Rational Software Corp have been hit hard this week, losing more than 30% of their value since Monday, amid fears of increased competition coming from Oracle Corp. Industry analysts believe Oracle is about to introduce a visual modeling software development tool that would compete directly with Rational’s Rose product, the current leader in market share. Based on this prospect, Hambrecht & Quist downgraded Rational on Tuesday to buy from strong buy. A threat to Rational Rose sales, which represents about a fifth of Rational’s total revenue, is obviously not being taken lightly by the market. Analysts at Deutsche Morgan Grenfell expect Oracle to ship the first version of the product – being developed by a team which includes ex- Borland employees with solid development tools experience – by the end of the calendar year, with a second version not long after. DMG sees the product being sold with Oracle’s Developer/2000 and Designer/2000 products. The irony here is that Rational proudly announced Monday that its newest version of Rose 4.0 supports Oracle8 but, presumably, Oracle’s own product would offer tighter integration and perhaps, a slight pricing advantage. DMG analyst Wendell Laidley sees the Oracle threat, coupled with Rational’s post-Pure Atria-merger sales force restructuring, as a risk to current estimates for FY98, currently at $0.56 per share. Laidley also sees pressure from Oracle leading Rational to accelerate product development, and the resulting increase in R&D spending could effect desired long term revenue growth, but at the expense of near-term earnings. In spite of the uncertainty for the next six quarters, DMG has left its rating at accumulate and hasn’t changed its estimates. There seems to be support for that stance, as other analysts who follow Rational have been heard saying that Oracle plans may well pose a threat, but there is no reason to believe that it is a particularly grave one. First Call estimates are $0.57 for 1998 and $0.85 for 1999. Through it all, Rational shares continued to stumble on Wednesday, falling $0.8125, or 5% to $15.375.
