FBN Securities‘s Shebly Seyrafi today initiated coverage of cloud computing stocks in a massive (146 pages) note to clients, giving Outperform ratings to Citrix Systems (CTXS), Salesforce.com (CRM), Netsuite (N), ServiceNow (NOW), Equinix (EQIX), and Akamai Technologies (AKAM), while rating VMware (VMW), Concur Technologies (CNQR),�RackSpace Hosting (RAX) and Workday (WDAY) all Sector Perform.
Seyrafi writes that all ten companies are “true cloud companies,” unlike some that have been accused of “cloudwashing.” He sees the market as a convergence of “the four major technology trends today,” namely, “cloud, Big Data, mobility, and social.”
Seyrafi cites data from Gartner that shows a wide disparity in how much of enterprise technology today has been converted to cloud-based offerings. Customer relationship management, for example, is about 39% cloud as of the end of 2012, going to 42% this year. For enterprise resource planning, on the other hand, it is just 10% of the total workload last year, moving to 12% this year.
There’s also a wide disparity in total estimates for the market, but a shared view among most observers that cloud computing is rising swiftly, he writes:
In September 2012, Gartner predicted that the worldwide cloud services market will surpass $112B in 2012 and grow to $207B in 2016. IDC predicted that the public cloud IT service market would be $40B in 2012 and approach $100B by 2016, so there are wide differences in opinions and definitions here. The largest segment for Gartner is BPaaS (business process as a service), which was estimated to grow to $84.2B (77% of the cloud services market; 45% growth) in 2012. The large size here was mostly due to the inclusion of cloud advertising (47% of the public cloud market). SaaS was expected to grow to $14.4B in 2012, while IaaS was expected to grow to $6.2B in 2012; Gartner predicted that by 2016 the IaaS market would be larger than the SaaS market. The PaaS market was expected to grow to $1.2B in 2012.
Within cloud “infrastructure software,” Seyrafi likes Citrix, giving it an $85 price target, citing the “XenDesktop” product, which is now around 60% of all “Mobile & Desktop” revenue for the company. He thinks VMware offers “key pieces of the software-defined data center puzzle” but that “Still, we think that it is too early to invest in VMW as there are multiple near-term challenges (increasing saturation of server virtualization, less momentum in the US/EMEA, ELA benefits expected to be back-end loaded in F2013) and valuation appears full at the current time.”
In software-as-a-service companies, he likes Salesforce’s efforts to “diversifies away from its core sales force automation (SFA)/sales cloud into service, marketing, and platform clouds.” Seyrafi writes Salesforce is number two in total customer relationship sales, behind SAP (SAP), having “eclipsed Oracle (ORCL) recently,” and “it may displace SAP to earn #1 spot this year.” Seyrafi gives the stock a $210 price target. ServiceNow, which offers hosted IT “operations management,” can expand into “new areas like platform and hybrid cloud.” He gives the shares a $45 price target. With respect to NetSuite, he likes how the company is gaining share in ERP, where “there is limited pure-play competition,” and he gives the stock an $85 price target.
Among “cloud data center” companies, he likes Equinix’s breadth of geographic locations around the world, the “stickiness” it is engendering among customers, and the payoff from its expected conversion to a real estate investment trust: “the expected conversion of the company to a REIT (by 2015) should result in much lower taxes starting in 2015 and in a large distribution ($700M-$1.1B, ~20% of which is cash, the rest in stock) to shareholders, with most of this expected to take place before 2015.” Seyrafi has a $270 price target on Equinix.
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