Technology

Huge Cloud Spending Top Catalyst for Data Networking Stocks to Buy

Lee Jackson

Published: October 22, 2016 10:10 am

Last Updated: January 13, 2020 2:04 am

Any way you look at it, the tremendous growth in all things cloud is perhaps the biggest single catalyst in the tech industry today. Whether it is cloud computing, storage, streaming or the combination of all the above, the incredible leap by companies looking to take advantage of the technology provided is gigantic. In fact, capital expenditures in the cloud are the strongest tailwind for telecom and networking stocks, and the likelihood of that changing anytime soon is quite small.

In a new research report, while remaining somewhat cautious, Deutsche Bank focuses on the companies with big cloud exposure, with five stocks ranging in market capitalization from mega-cap to small cap for investors to consider now. All are rated Buy and make good sense for long-term aggressive growth portfolios.

Acacia Communications

This company had a red-hot IPO and has backed up sharply since a recent secondary offer. Acacia Communications Inc. (NASDAQ: ACIA) is a leading supplier of high-speed coherent optical interconnect products to network equipment manufacturers, hyperscale cloud companies and service providers. The company’s foundation is in its Digital Signal Processing (DSP) and a unique approach with its silicon-based photonic integrated circuit (SiPhi PIC). The company primarily combines the DSP and PIC to create modules, which are integrated into optical/networking equipment to provide high-speed optical interconnect.

Top Wall Street analysts have increased estimates following Acacia’s positive pre-announcements and secondary offering completed last week. Acacia continues to benefit from strong demand across Web 2.0 direct customers, Chinese original equipment manufacturers and metro 100G cycles. Acacia additionally is benefiting from strength in China broadband optical roll-outs.

The Deutsche Bank price target for the stock is a stunning $125, and the Wall Street consensus target is lower at $119. The shares closed Friday at $84.79.

Akamai Technologies

This company posted solid inline second-quarter numbers, but the guidance stunned Wall Street. Akamai Technologies Inc. (NASDAQ: AKAM) is the self-described global leader in content delivery network (CDN) services, Akamai makes the internet fast, reliable and secure for its customers. The company’s advanced web performance, mobile performance, cloud security and media delivery solutions are revolutionizing how businesses optimize consumer, enterprise and entertainment experiences for any device, anywhere.

Akamai guided current-quarter profit and sales estimates lower as customers such as Apple and Facebook moved more media traffic to their own networks. Top analysts on Wall Street feel that beyond these big customers and their do-it-yourself moves, the company posted solid top-line growth that came in the mid-teens range. They also point out the company remains well capitalized and can continue share repurchase, with the CEO, Dr. Tom Leighton, leading the way with his personal repurchase plan.

Deutsche Bank has a $70 price target, and the consensus target is $60.22. The shares closed Friday at $57.67.

Arista Networks

This company went public in the summer of 2014 and has continued to be one of the hot tech stories. Arista Networks Inc. (NYSE: ANET) delivers software-driven cloud networking solutions for large data center and computing environments. In addition, its 10/40/100 gigabit Ethernet switches offer scalability and performance, and they have over 2,700 customers and more than 2 million cloud networking ports deployed worldwide. At the core of Arista’s platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers.

Many on Wall Street think that the company could benefit from dual supplier requirements at the Web 2.0 and cloud portals, and they think Arista could see upside to the lofty 30% compound annual growth rates currently forecast. Some also see the stock benefiting as networking vendor that is leveraged to data center deployments.

The Deutsche Bank price target is $85. The consensus estimate is listed at $82.06, but shares closed Friday at $83.58.

Cisco

This is the top mega-cap technology stock pick at Deutsche Bank. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.

Cisco offers service provider video infrastructure, including set-top boxes, cable/telecommunications access products, and cable modems, as well as video software and solutions. In addition, it provides collaboration products comprising unified communications products, conferencing products, telepresence systems and enterprise mobile messaging products; data center products, such as blade, rack and modular servers, fabric interconnects, software and server access virtualization solutions; security products, including network and data center security, advanced threat protection, web and email security, access and policy, unified threat management, and advisory, integration, and managed services; and other products, such as emerging technologies and other networking products.

Analysts across Wall Street point to an estimated double-digit bookings momentum for Cisco’s Meraki Cloud Services. Many think that Meraki is likely to be a $1 billion plus run-rate business this year, with an incredible 50% to 70% compounded annual growth rate. A jump from 40 GE to 100 GE data center switching and next generation security are also adding to the total sales profile and product mix.

Cisco investors receive a 3.45% dividend. The $37 Deutsche Bank price target compares with the consensus target of $33.30. The shares closed Friday at $30.15.

Corning

This was a huge player in the fiber build-outs in the 1990s and may be ready to ramp back up for new deployments. Corning Inc. (NYSE: GLW) is one of the world’s leading innovators in materials science. For more than 160 years, Corning has applied its unparalleled expertise in specialty glass, ceramics and optical physics.

Its products enable diverse industries such as consumer electronics, telecommunications, transportation and life sciences. They include damage-resistant cover glass for smartphones and tablets; precision glass for advanced displays; optical fiber, wireless technologies and connectivity solutions for high-speed communications networks; trusted products that accelerate drug discovery and manufacturing; and emissions-control products for cars, trucks and off-road vehicles.

Deutsche Bank sees the company being highly leveraged to large spending growth that they expect to see in data center optical connectivity. The firm also ranks Corning as its top pick in the space going into third-quarter earnings, with expectations that the company will modestly beat estimates and raise forward numbers versus consensus.

Corning investors receive a 2.27% dividend. The Deutsche Bank price target is $25. The consensus target is $22.57, and shares closed Friday at $23.82.

Growth in the cloud will endure as demand from consumers and business will continue the unprecedented growth. If there is one area in technology investors should look at it is probably this space, and any of these top stocks are a good way to participate.