3 Mega Cap Technology Stocks Dominate the Cloud

By Lee Jackson Updated Jan 13, 10:52AM EST · Published Apr 12, 11:10AM EDT

Follow 24/7 Wall St. on Google

This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.

3 Mega Cap Technology Stocks Dominate the Cloud — © Thinkstock

Needless to say, the migration to the cloud for a variety of services for everybody from the individual consumer to the largest corporate enterprise has become ubiquitous. In what should be little if any surprise to most technology investors, due to the sheer size and money required, three top technology mega cap leaders dominate the platform, and there is every reason to believe they will continue to do so for some time.

In new and separate research reports, Merrill Lynch focuses in on the companies that are dominating the cloud with a superior presence and product. All three are rated Buy, and they have the very deep pockets and expertise to continue to dominate for years to come.

Alphabet

This technology giant is the top pick all across Wall Street. Alphabet Inc. (NASDAQ: GOOGL) builds technology products and provides services to organize the information. The company offers Google Search, which provides information online; Google Now, which offers information to users when they need it; AdWords, an auction-based advertising program; AdSense, which enables websites that are part of the Google network to deliver ads; DoubleClick Ad Exchange, a marketplace for the trading display ad space; and other advertising platforms, such as AdExchange and AdMob.

Alphabet also provides YouTube, which offers video, interactive and other ad formats; Android, an open source mobile software platform; hardware products, including Chromebook, Chrome OS devices, Chromecast and Nexus devices; Google Play, a cloud-based digital entertainment store for apps, music, books and movies; Google Drive, a place for users to create, share, collaborate and keep their stuff; and Google Wallet, a virtual wallet for in-store contact-less payments.

Many Wall Street analysts have lauded the numerous upcoming catalysts and point out that the company has shown consistent revenue growth and margin stabilization, and it finally gave cash back in the form of a $5.1 billion stock buyback last year. Last, but certainly not least, the company remains one of the best overall portfolio plays that focuses on the biggest Internet trends: the mobile/multiscreen shift, wearable devices, video, the Internet of Things and much more. Alphabet delivers investors the full package.
[recirclink id=325451]
The Merrill Lynch analysts cite the company’s growing presence in the cloud, which they ultimately feel can be a $7 billion revenue opportunity by 2020. The current cloud products offered by the company are improving, and the analysts cite five potential strengths and key potential adoption drivers for the company:

Sell the company’s infrastructure strength as a competitive advantage
Increasing platform capabilities and service offerings
Offering competitive pricing
The leverage traction of Google for Work
Improving customer and system integrator outreach

With the company targeting a total addressable market (TAM) of $120 billion by 2020, the analysts feel revenue can jump from $1 billion last year to $7 billion by then. Plus, they see a big jump in capital expenditures by the company as it continues to build out the cloud platform.

The Merrill Lynch price target for the stock is a whopping $945, while the Thomson/First Call consensus price target is $926.82. The stock closed trading on Monday at $757.54 per share.

Amazon

This company is the absolute leader in online retail, and it is also a dominant player in cloud storage business, though it missed estimates badly and got hit hard in January. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.

In addition, the company serves developers and enterprises through Amazon Web Services (AWS), which provides compute, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is the undisputed leader in the cloud now, and the Merrill Lynch team see the company expanding and moving up the enterprise information value chain and addressing a larger TAM.

The company has had numerous recent product announcements, including Aurora for relational database engine, Quicksight for business intelligence and AWS Database Migration Support Service. The analysts also think that AWS will continue to be a huge driver of Amazon’s operating profit growth, growing an astonishing 55% year over year in 2016 to $12.2 billion. In the sum-of-the-parts analysis, AWS is a staggering $202 per share, over a third of the current dollar amount.

Merrill Lynch has a $750 price target for the stock, and the consensus price objective is set at $732.78. The shares closed most recently at $595.93.

Microsoft

This is another top technology stock that gives investors a degree of mega-cap tech safety, and it has a massive $102 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year.

Numerous Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service. Some analysts maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger user.

Top analysts believe the company continues to make steady progress with its cloud transition and expect Office 365 and Azure to be solid contributors to top and bottom lines for the next several years. While not likely to snag the top slot from Amazon, it could add huge incremental revenue for years to come.

In addition, with gaming revenues growing at a huge pace, the Xbox continues to gain ever more fans as the ultimate console to own. The company continues to upgrade the popular device, and many think that it could dominate Sony’s PlayStation at some point down the road.

Microsoft investors are paid a very solid 2.65% dividend, and the forward valuation remains compelling. The $65 Merrill Lynch price target is well above consensus target, which is set at $58.80. The stock closed Monday at $54.49.
[recirclink id=325409]
The three leaders are hardly going to cede much ground to the competition, so pricing may be an issue going forward. That said, these companies should remain the cloud’s top purveyors for years to come.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.