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Massive Cloud Spending Continues to Benefit 5 Tech Leaders

The proliferation of the cloud continues to be one of the most amazing stories in the ever-expanding world of technology. Since the introduction of the smartphone in 2007, just a short 10 years ago, the demand for data for both streaming and downloads has exploded. Toss in massive new Internet of Things applications, big data use, a huge directional change in media and entertainment, and a multitude of additional structural uses, and the growth just keep exponentially going higher.

While cloud growth continues almost unabated, so does spending for maintenance and expansion. A new RBC research report traces closed expenditures, and they continue at a furious pace. They report noted:

Cloud service provider capital expenditures grew ~23% year over year in the third quarter and increased 24% quarter over quarter in our tracker, while the fourth quarter is expected to be stable seasonally, and grow +19% year over year with notable acceleration at Facebook Inc. (NASDAQ: FB) and Microsoft Inc. (NASDAQ: MSFT). Most of the large hyperscale vendors saw capex trend up year over year in the September quarter. Wall Street estimates project that our Cloud constituents could spend $61.4 billion in 2017 in capex, up 17% year over year from $52.4 billion in 2016(versus 17% growth in 2016).

The analysts point out that the companies that look to benefit the most from this huge spending are the hard disk drive and select semiconductor companies. They highlighted five that they feel offer lower risk and could be big beneficiaries.

Broadcom

This company has been on fire over the past year and remains the top pick at RBC and across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.

Surprisingly, the stock remains underowned compared to peers, and the 40% iPhone content growth, combined with huge cloud growth, are big factors in pushing shares higher. RBC noted this in its report:

Broadcom has exposure to the cloud through their Enterprise Storage segment (HDD controllers) and general data center buildouts in their Wired Infrastructure segment. Within Hard Disk Drives, enterprise units are 15-20% of the business on a unit basis and 20-30% on a revenue/profit basis. We estimate cloud/hyperscale build outs contribute to 65% of the segment. Cloud and hyperscale spending is probably the fastest growing sub segments within the enterprise businesses of the HDD manufacturers.

Broadcom investors receive a 1.63% dividend. The RBC price target for the stock is $300, and the Wall Street consensus target is $291.64. Shares closed Monday at $265.01.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers, and the Internet of Things is a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Intel also destroyed estimates and raised its full-year outlook when the company reported quarterly earnings that easily topped analysts’ expectations last week. The company reported adjusted earnings per share of $1.01, while overall revenue was pegged at $16.15 billion. Client computing revenue totaled $8.86 billion, and Data Center revenue was $4.88 billion.

Intel investors receive a 2.4% dividend. RBC rates the shares at Sector Perform with a price target of $44.The consensus price objective is $44.74. Shares closed Monday at $45.75.


NVIDIA

This top chip stock has reported very strong earnings, and it was the top performing stock in the S&P 500 last year. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.

NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Jefferies sees the stock continuing to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units (GPUs) in the cloud.

The company posted gigantic third-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI business.

Investors receive a 0.33% dividend. The $240 RBC price target accompanies an Outperform rating. The consensus target is just $202.30, but shares closed Monday at $212.63.

Seagate Technology

This probably is one of the most disliked tech stocks now, and it is down over 30% since April. Seagate Technology PLC (NASDAQ: STX) designs, manufactures and sells electronic data storage products in the Asia-Pacific, the Americas and EMEA (Europe, Middle East and Africa) countries.

The company provides hard disk drives, solid state hybrid drives, solid state drives, PCIe cards and serial advanced technology architecture controllers that are designed for enterprise servers and storage systems in mission critical and nearline applications, as well as for client compute applications comprising desktop and mobile computing.

One of Wall Street’s biggest activist investors, ValueAct Capital, became one of Seagate’s largest shareholders last year with a 9.5 million share stake. The firm reported in August that it owned a 7.2% stake in the company at 13.82 million shares.

Seagate shocked Wall Street when it posted results that blew away estimates and sent the share rocketing higher. The posted earnings per share for its fiscal first quarter of 2018 were less than in the same period last year, but it came in well above the Wall Street earnings estimate for the quarter. The company also reported revenue that was lower than in its fiscal first quarter of 2017, but again much better than the analysts expected.

Investors receive a 6.63% dividend, but that could be cut. RBC rates the shares Sector Perform, and their $40 price target compares with a consensus target of $37.48. Shares ended Monday at $37.66.

Western Digital

This long-time innovator in the storage industry is a leader in the total addressable HDD market. Western Digital Corp. (NASDAQ: WDC) is an industry-leading developer and manufacturer of storage solutions that help to create, manage, experience and preserve digital content.

The company is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.

The stock traded down after earnings due to concern on peak margins, despite earnings guidance for the fourth quarter and fiscal 2018 that was better than Wall Street expectations. NAND supply-demand will not come into balance until mid-calendar 2018. So RBC and most on Wall Street feel the shares have room to run.

Shareholders receive a 2.28% dividend. RBC’s Outperform rating comes with a $115 price target. The consensus target is $113.81, and shares closed on Monday at $88.44.

These five companies are reaping the benefits of the huge growth in the cloud. With more and more data centers coming online to handle the tremendous volume from consumers and business, you can bet that the torrid growth and spending will stay in place for years to come.

By Lee Jackson


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