Technology

Massive Cloud Growth Has Top Analyst Bullish on Large-Cap Tech

Lee Jackson

Published: March 20, 2018 8:25 am

Last Updated: January 12, 2020 2:17 am

It’s been going on for some time, and many on Wall Street see it continuing. Technology has been the leading sector in the markets, and there is little reason to think that comes to an end anytime soon despite the Monday sell-off. After all, the United States is the global leader in the sector, with many of the top companies based in Silicon Valley area near San Francisco. With demand and innovation continuing to explode, there is little reason to sell the sector now.

A new report from Kash Rangan, the outstanding software analyst at Merrill Lynch, indicates that, after reviewing the firm’s survey data, he expects a total addressable market for the public cloud of a stunning $155 billion by 2023. He also expects a compound annual growth rate to be at 27% to 29%, which represents phenomenal growth.

Six large-cap tech leaders look to benefit from this incredible demand and growth, and all are rated Buy at Merrill Lynch.

Alphabet

The search giant continues to expand and is even working on a driverless car now. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.

Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.

Fourth-quarter results raised concerns on Wall Street around margin compression. However, top-line outperformance continued, with 24% revenue growth, and incredibly Google Cloud is now at a $4 billion run rate.

The Merrill Lynch price target for the shares is $1,360, and the Wall Street consensus estimate is $1,280.93. Shares closed Monday at $1,100.07.

Amazon

This absolute leader in online retail and dominant player in cloud storage business remains a top pick at Merrill Lynch. 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.

The company serves developers and enterprises through Amazon Web Services (AWS), which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.

Merrill Lynch has a $1,650 price target, and the consensus target is $1,670.66. Shares closed Monday at $1,544.93.

IBM

This blue chip leader has rallied but still may be offering investors among the best entry point in years. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward.

IBM posted better than expected fourth-quarter results, and for the first time in 22 consecutive quarters, revenue declining on a year-over-year basis has ended. Now that streak has finally ended, it looks like a positive sign as the company faces competition from faster-growing companies.

IBM shareholders receive a 3.81% dividend. The $200 Merrill Lynch price target compares with a $170.75 consensus target. Shares closed Monday at $157.35.

Microsoft

This top old-school technology stock has posted all-time highs this year and has a massive $121.79 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 cloud was big in the recent earnings report, which was outstanding.

The company has been somewhat quieter on plans for its huge trove of overseas funds, but CEO Satya Nadella surely has big plans for any repatriated money, be it pay off debt, buy back shares, hire employees or spend on research and development.

Shareholders receive a 1.81% dividend. Merrill Lynch recently raised its price target to $106 from $98. The consensus price objective is $104.39. The stock closed Monday at $92.89 a share.

Oracle

This top software stock has had a solid run, but a poor quarter hit shares Tuesday morning. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.

The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.

The company posted earnings Monday after the close that prompted some Wall Street firms, including Merrill Lynch, to cut ratings on the stock. The company has always had the tendency to report soft quarters over the years, and the dip in the shares may offer a solid entry place to buy shares.

Shareholders receive a 1.45% dividend. Merrill Lynch lowered its price target $57 from $62. The consensus price target is $55.83. The stock closed Monday at $51.95, but shares traded at $47.60 in Tuesday’s premarket.

VMware

This may still be one of the best stocks to own, and it has been on a tear this year. VMware Inc. (NYSE: VMW) provides virtualization infrastructure solutions in the United States and internationally. Its virtualization infrastructure solutions include a suite of products designed to deliver a software-defined data center run on industry-standard desktop computers and servers, and support a range of operating system and application environments, as well as networking and storage infrastructures. Its solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity.

This is one company that may be poised to benefit big-time in 2018 as corporate budgets start to loosen up and spending increases. The passing of the tax reform bill also could kick-start that process. In addition, recent surveys suggest that expectations for budget growth at major corporations requiring VMware’s products are at a nine-year high.

VMware is uniquely positioned to benefit from budget growth given its global installed base, especially related to larger enterprise license agreements, as well as the share of wallet virtualization it has within most IT budgets.

The Merrill Lynch price target is $161. The consensus target is $138.47, and shares closed Monday at $125.59.

Six top companies that should continue to benefit as the massive public cloud growth continues almost unabated. While not suitable for all accounts, those looking for growth now, and in the years to come, would do well to own them for technology exposure.