Technology

2 Stocks Will Benefit Greatly If the Big Banks Move to the Cloud

Lee Jackson

Published: June 10, 2016 8:45 am

Last Updated: January 13, 2020 6:58 am

Almost 25% of global enterprise information technology (IT) spending is doled out by the financial services industry, which includes insurance companies, and when you think about the tremendous daily demands on the companies in the sector, that huge number seems realistic.

One thing that the big banks and financial services firms have been slow to adopt is moving to the public cloud because of the obvious regulatory, security and legacy IT issues.

A new research report from Deutsche Bank notes that recent anecdotal evidence seems to suggest that the large banks and financial services leaders are considering moving to the cloud for computing or infrastructure workloads, and that adoption could start to ramp materially next year.

Given the level of spending required, this business could be huge, and the Deutsche Bank team sees two industry giants benefiting and both are rated Buy.

Amazon

This company is the absolute leader in online retail, and it is also a dominant player in cloud storage business. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites, which 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 many top analysts team see the company expanding and moving up the enterprise information value chain and Addressing a larger total available market. The company has had numerous recent product announcements, including Aurora for relational database engine, Quicksight for business intelligence and AWS Database Migration Support Service.
Some analysts also think that AWS will continue to be a huge driver of Amazon’s operating profit growth, increasing an astonishing 64% year over year in 2016 to $12.2 billion. In the sum-of-the-parts analysis, AWS is a staggering $202 per share, almost a third of the current dollar amount. If they add substantial business from the big banks and financial services companies, earnings could explode even higher.

The Deutsche Bank price target for the stock is $900, and the Thomson/First Call consensus price objective is set at $800.79. Shares closed on Thursday at $727.65.

Microsoft

This top old-school technology stock gives investors a degree of mega-cap tech safety and has a massive $105 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 and last.

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. Analysts also maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.

The 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 line 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, especially when you factor in the huge revenue potential from the banks, insurance companies and the financial services industry.

With gaming revenues also growing at a huge pace, the Xbox continues to gain more and 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 2.78% dividend, and the forward valuation remains compelling. The Deutsche Bank price target is $65, and the consensus target is set at $57.65. The stock closed Thursday at $51.62 per share.

The Deutsche Bank team does note that Alphabet Inc. (NASDAQ: GOOGL), which is also rated Outperform, is a potential cloud player for a share of the bank and financial services revenue, but clearly Amazon and Microsoft are the current dominant players in the industry. The pace at which the cloud is adopted may vary, but obviously it appears that more revenue is headed that way.